Hong Kong's chief markets regulator, the Securities and Futures Commission (SFC), has been a busy place of late. Currently on the reform agenda are 21 separate proposals designed to streamline and improve the IPO process in Hong Kong. These measures have assumed a greater international relevance since Hong Kong has cornered the market for China listings after America cooked its own China goose with Sarbanes-Oxley.
The SFC is currently in consultation mode and wants feedback on the measures, most of which constitute laudable improvements to the current system, a cumbersome and over-regulated documentary morass. If you doubt it, just ask one of Hong Kong's bleary-eyed bankers.
On the thorny matter of pre-deal research, however, the SFC has demonstrated considerably less backbone. Indeed one of its proposals looks like a messy fudge that threatens to make the current IPO procedure more cumbersome not less so.
Many serious markets, the US and Japan among them have already banned pre-IPO research issued by sponsors and deal-related investment banks on their clients as inherently flawed and impossibly biased. Hong Kong, like much of Europe has continued to accept this fiction as useful to an IPO. Anyone who has worked on IPO transactions will tell you that the vast majority of this research is little more than data regurgitated and reformatted from the company prospectus, together with some financial forecasts and always stamped with a cheerily optimistic recommendation. Few respectable institutional investors pay heed to these sales brochures: serious fund managers generally rely on their own research.
The obvious solution is to consign this form of research to history's dustbin, but the SFC, presumably influenced by powerful vested interests, is offering an alternative to an outright ban. It is considering allowing pre-deal research with the proviso that in the event that research leaks to the press, the company will be obliged not only to publish the data but to comment on it as well.
Which is pretty much what happens now. Hong Kong's stock market must be one of the most leaky in the developed world and regulators are often among the worst perpetrators. Barely an IPO proceeds these days without sensitive and non-prospectus data appearing in the local media. The resulting paper chase between the SFC, the Hong Kong Stock Exchange, issuers and advisers is costly, time-consuming and unprofessional. If the SFC's proposal to permit pre-deal research proceeds, Hong Kong will be faced with the amusing but embarrassing prospect of a company being required to analyze the analysis of an analyst on its own company.
Supporters of pre-deal research claim it is a vital tool to help divine valuation and pricing for an IPO. That is risible. Any investment bank worth its salt has arrived at a detailed company valuation internally long before the launch of the IPO and without the need to test the market with a piece of research that everyone knows is tainted. All of the necessary negotiations on valuation between willing buyer and seller will take place during the bookbuilding process, whether or not this research is produced. After all, isn't that what happens now in the US?