HKEX Consultation Conclusions on The Main Board Profit Requirement and Review of Listing Rules Relating to Disciplinary Powers and Sanctions

The Stock Exchange of Hong Kong Limited ( the “HKEX”) published two consultation conclusions —"The Profit Requirement Consultation Conclusions” and “Disciplinary Consultation Conclusions” on 20 May 2021 with an aim to further raising the quality of the Hong Kong capital market,. Among them, HKEx has decided to increase the profit requirements of the Main Board by 60%, with effect from 1 January 2022. That is, the most recent financial year shall not be less than HK$35,000,000 and, in respect of the two preceding years, be in aggregate not less than HK$45,000,000 (The three-year cumulative profit is not less than HK$80,000,000). At the same time, the HKEX will also grant grace for individual applicants that do not meet the profit distribution, and handle them flexibly.

The Profit Requirement is one of the three pivotal financial eligibility tests forming part of the assessment the HKEX performs to determine the suitability of applicants seeking to list on the Main Board. The most recent increase in the market capitalisation requirement was in 2018, from HK$200 million to HK$500 million. However, the profit requirement has not been revised since it was introduced in 1994.

The consultation conclusion pointed out that certain cases involving suspected arrangements to artificially satisfy the initial listing requirements. The Securities and Futures Commission of Hong Kong (the “SFC”) stated in a joint statement that certain IPO may allocate shares to controlled placees at a high share price to meet the HK$500 million minimum market capitalisation requirement. Its purpose is to manipulate the relevant shares in the future. For example, through a ramp-and-dump scheme to “ramp” up the share price. Ramp-and-dump scheme is a form of stock market manipulation where fraudsters use different means to “ramp” up the share price of a listed company and then induce unwary investors to purchase the shares that the fraudsters then “dump” at an artificially high price. The schemes are typically conducted using social media platforms.

In light of the concerns identified in the joint statement, where a listing application displays one or more of the following features, the SFC and HKEX will make enquiries: 

• The applicant’s market capitalisation barely meets the minimum threshold under the Listing Rules
• Very high price-to-earnings (“P/E”) ratio
• Unusually high underwriting or placing commissions or other listing expenses
• Shareholding is highly concentrated in a limited number of shareholders

On the same date, HKEX has also published a disciplinary consultation. It will augment the range of reputational sanctions available.  It will ensure that disciplinary action can be brought against a broader range of individuals, including members of senior management, if they cause or knowingly participate in a contravention of the Listing Rules. The disciplinary consultation conclusions will be implemented with effect from 3 July 2021.

Click the below cover images to read the Consultation Conclusions and the Joint Statement. 

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