Bright Silver International: Positive and negative impacts brought by the proposed adjustment of the IPO clawback ratio by Hong Kong Stock Exchange.

Guangyin International released a research report saying that by the end of 2024, Hong Kong Stock Exchange will release consultation documents to optimize the pricing and allocation mechanism for Initial Public Offerings (IPOs), which includes a proposal to lower the cap on the clawback mechanism for public offerings. The consultation period is three months, ending on March 19 this year. Overall, there are arguments for and against adjusting the clawback mechanism. Supporters argue that the new mechanism will provide more flexibility to issuers and attract more quality companies to list in Hong Kong, while opponents argue that the new mechanism will reduce retail investor participation, leading to losses for investors and potentially harming the interests of some securities firms. Key points from Guangyin International include: 01. Hong Kong Stock Exchange proposes two new options. Under the current clawback mechanism, new shares are typically allocated with 10% for public subscription (retail investors) and 90% for international subscription (institutional investors), with the possibility of clawing back up to 50% based on oversubscription multiples. The clawback mechanism unique to the Hong Kong stock market originated in 1998 to address the needs of retail investors, who accounted for 53% of trading volume in 1997. The Exchange has proposed two options: setting the initial public subscription at 5% with a maximum clawback of 20%, or setting the initial public subscription between 10% and 50% without a clawback mechanism. 02. New clawback mechanism aligns better with current investor structure. With the development of the capital market, retail investors in the Hong Kong market now account for less than 15% of trading volume. The new market structure aligns institutional and retail investors more appropriately. Institutional investors have greater bargaining power and play a key role in pricing, ensuring that the offering price reflects market demand and reducing the chances of overpricing or trading below the IPO price. Additionally, the new mechanism provides issuers with more flexibility and encourages more quality companies to list in Hong Kong. 03. Participation of retail investors in new stocks may decline. However, under the new clawback mechanism, the participation of retail investors in new stock offerings may decrease, leading to a decline in profitability for small and medium-sized securities firms. If the clawback limit is adjusted to 20%, it means retail investors can buy a maximum of 30% less in new shares. For most securities firms, revenue mainly comes from a 1% brokerage commission collected from clients who secure new shares and from commissions when shares are sold. The new clawback mechanism decreases the chances of retail investors securing shares, thus reducing brokerage income. Some smaller securities firms may struggle to profit from new stock offerings.