- In Hong Kong, stocks can only start trading five days after book close
- City’s bourse is very advanced in its study of shortened settlement cycles, law firm says
The cancellation of Budweiser Brewing Company APAC's mega flotation has hurt more than just Hong Kong's global listings ambitions. Retail investors, who had borrowed a combined HK$38 billion (US$4.8 billion) for the initial public offering, have lost thousands of dollars in interest payments, an issue that has once again highlighted the city's lengthy listings process.
The investors will have to bear the cost, stockbrokers said, after brewing giant Anheuser-Busch InBev scrapped the US$9.8 billion IPO of its Asia unit on Saturday, about a week before the shares were to debut on the Hong Kong stock exchange. The listing would have been the largest globally this year and would have boosted the city's chances of reclaiming the crown of the world's top IPO market.
At an interest rate of between 3.8 per cent and 5 per cent, the investors will have to collectively pay HK$28 million to HK$36 million in interest.
"The cancellation of Budweiser's IPO shows more needs to be done to shorten the IPO settlement period, which will benefit investors and will enhance overall market efficiency. It is not ideal " locking up such a huge sum of capital for almost a week," said Laurence Li Lu-jen, chairman of government-appointed industry promoter Financial Services Development Council.
A spokeswoman for Budweiser said: "The application forms clearly state the refund will be without any interest, and this is aligned with market practice."
The high cost is a result of the length of the settlement period. Even though Hong Kong is one of the worlds' largest IPO markets, its settlement period is among the lengthiest among major centres " stocks can only start trading five days after book close, denoted as T+5.
The settlement period in the United States, Britain and even mainland China, for instance, is T+1, with trading starting the following day, once an IPO has been priced.
Bonnie Chan, partner at law firm Davis Polk, said the Hong Kong bourse was very advanced in its study of shortened settlement cycles. "Budweiser is just an illustration of why the change is necessary," she said.
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Charles Li Xiaojia, chief executive of bourse operator Hong Kong Exchanges and Clearing, said in May the bourse was considering an electronic platform that would improve fund flows as well as IPO settlement times, reducing them to T+1.
On Wednesday and Thursday, Hong Kong brokerage Bright Smart Securities took out adverts in four local newspapers calling for changes to listing rules and requiring issuers to compensate investors for interest payments if an IPO is cancelled last minute.
"The current listing rules have failed to protect the interests of investors. Companies such as Budweiser can cancel their offering in the last minute, with no need to compensate investors. It is not fair," said Edmond Hui, Bright Smart's executive director and chief executive.
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Clement Chan Kam-wing, managing director of accounting firm BDO, however, said the shortening of IPO settlement periods might not be good news for listed companies.
"At present, the issuers receive the subscription money from investors five days in advance of their trading. Companies will feel more secure with this arrangement. They can also earn interest during this period of time. If the settlement period is shortened, then listed companies will no longer earn this interest," he said.
He added: "Stockbrokers might also be opposed to the shortening of settlement times as this will cut down their income from interest earned from lending money to customers for subscription to the new shares."
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