HKEx Defines and Restricts High Dilution: An In-Depth Reading
Over the past few years, the Hong Kong Stock Exchange has raised its regulatory levels on Hong Kong stock market as a result of enhanced interaction between China and Hong Kong in terms of stock transactions. In particular, supervision on banker has become significantly strict. On this ground, the Exchange, in May, publishes conclusions of its consultations on capital raisings and amendments to Listing Rules, which is expected to take effect on 3rd July.
Discussions of the definition of “highly dilutive capital raisings” have been in place for a while, and now the HKEx offers an answer to the market. Any activity that would result in a cumulative material value dilution of 25 per cent or more is deemed highly dilutive. In other words, listed companies will take 25% as a definite boundary when they undergo changes in capital stock.
Although at the outset amendments seem to aim against high dilution, pragmatically speaking they appear more to work against rights issue of “large proportion and large discount”. This kind of issues usually shares a number of similarities: firstly subdivision of rights issued is exceptionally high (for instance 1 to 10, or even 1 to 20); secondly and also consequently, the offerings usually lead to a significant price discount, with a ratio as high as 90%.
Within banker stock market, such rights issues are frequently regarded as lethal weapons. In addition to shareholders having to bring out a large sum of money, highly depreciated issue price is probable to induce an immediate drop of stock price, and affect shareholders’ willingness to participate in rights issue since they have already witnessed substantial deficit. Small shareholders faces a dilemma: to take part in the issue means that they have to bear the risk of recurrent price drop, while going the opposite way will dilute their stock right and the stocks they hold may become odd lots.
Although new rules will become effective in July, such lethal weapons were rarely seen from the stock market in recent years. Unless the listed company suffers from financial difficulties and is close to liquidation if no further rights are issued, the HKEx now seldom allows such rights issue from coming into being.
In fact, the Exchange has revealed its tendency to heighten regulatory strength on capital raisings via a number of channels. Amending the Listing Rules is just one last step of giving all its previous actions an official authentication. For example, in the Listing Decisions published in December 2016, the HKEx disapproved an issuer’s proposal of a subdivision of 1 to 20.
Nevertheless, the duet between the Exchange and bankers shall not end here. How future bankers will counteract new regulatory thresholds may turn out more exciting than a TV drama.
Image source: HKEx