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Fudging Hong Kong's IPO numbers

The Special Administrative Region's regulator has botched its attempt to clean up the thorny issue of pre-deal research.

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.

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