In-depth analysis of the new rules on IPO pricing by the Hong Kong Stock Exchange: What does it mean for all parties involved?

On August 1, 2025, Hong Kong Exchanges and Clearing Limited's wholly-owned subsidiary Hong Kong United Exchange Limited issued a consultation summary on optimizing the pricing and public market regulations for initial public offerings and began further consultations on the proposed continuous public shareholding amount. This reform by the HKEX on the new share pricing mechanism will have far-reaching effects. 1. Adjustment of the minimum allocation for the cornerstone tranche According to HKEX's definition, the tranche refers to the securities offering in the IPO where designated individuals approved by the issuer or intermediaries can subscribe. The cornerstone tranche refers to the portion of the tranche that cornerstone investors did not subscribe to. The new rule mandates that the issuer allocate at least 40% of the initial offering shares to the cornerstone tranche (the minimum allocation ratio has been lowered from the original proposal of 50% to 40%). This means anchoring at least 40% of the total issued shares (excluding treasury shares). For institutions participating in IPOs: Enhancement of pricing influence: More shares allocated to the cornerstone tranche means greater institutional investor participation in the pricing process. With their professional research and analysis capabilities, institutional investors can play a bigger role in negotiations with the issuer, resulting in a pricing closer to the true value and reducing pricing deviation risks. The higher allocation ratio provides institutions with more opportunities to invest in quality new shares, allowing them to optimize their investment portfolios. For retail investors participating in IPOs: Indirect benefit from reasonable pricing: While retail investors have limited direct involvement in pricing, institution-led reasonable pricing can reduce post-listing price volatility risks. The new rules encourage institutions to play a role in pricing, making pricing more reasonable and reducing underpricing cases. Changes in subscription competition: An increase in the cornerstone tranche allocation may lead to a relative decrease in the public subscription tranche, intensifying competition for retail investors during subscription. However, with more reasonable pricing, quality new shares may exhibit more stable performance post-listing, making them attractive to retail investors focused on long-term returns. For listed companies and market management entities: Attracting quality institutional investors: To attract institutional investors to participate in the cornerstone tranche, listed companies must emphasize their fundamental prospects and the quality of information disclosure. This will help companies select long-term stable and high-quality investors, optimizing shareholder structure. Improvement in pricing rationality: Institution-led pricing can better reflect the market's expectations for the company, avoiding deviations from company value due to irrational retail subscriptions. Reasonable pricing benefits the market value performance post-listing and reduces significant price fluctuations due to unreasonable pricing, providing a more stable foundation for market value management. 2. Mechanism adjustments for allocation to the public subscription tranche Newly listed applicants are allowed to choose between Mechanism A or Mechanism B as the allocation mechanism for the IPO. Mechanism A replaces the existing allocation and clawback mechanism with a specified allocation ratio for the public subscription tranche, with the maximum clawback percentage increased from the original proposal of 20% to 35%. Mechanism B introduces a new option that requires the issuer to pre-select a proportion allocated to the public subscription tranche, with a minimum of 10% (up to 60%) of the offering shares and no clawback mechanism. For institutions participating in IPOs: Clear expectations on share allocation: Under Mechanism B, institutional investors can more clearly anticipate the number of shares they will be allocated in the subscription tranche. Institutions can make informed decisions based on their funds and investment plans when participating in the cornerstone tranche subscription. Optimization of investment strategy: For Mechanism A, although there is a clawback mechanism, the maximum clawback percentage is clear and has been increased, allowing institutions to adjust their pricing and subscription strategies more accurately based on the popularity of public subscription. For retail investors participating in IPOs: More clarity in the subscription process: For some high-profile companies, if the new stock adopts Mechanism B and specifies the public subscription ratio, retail investors can refer to past cases to roughly estimate their chances of winning shares in a certain category. In Mechanism A, the increase in the clawback limit increases the probability of winning shares, allowing retail investors to adjust their subscription strategy based on market conditions. For listed companies and market management entities: More flexibility in choices under the new regulations: Issuers can choose the appropriate mechanism based on their characteristics and market conditions. This flexibility helps companies achieve their financing goals and optimize shareholder structure. Reduced difficulty in market value management: Companies can adjust their IPO strategies by selecting different mechanisms in response to market volatility or changes in investor preferences, increasing the likelihood of a successful listing and market acceptance. 3. Maintenance of cornerstone investment lock-up period regulations The HKEX has decided to retain the existing 6-month lock-up period for cornerstone investments to maintain investor commitment to the offering. For institutions participating in IPOs: Stable investment expectations: The 6-month lock-up period for cornerstone investors, while limiting short-term liquidity, encourages more in-depth research and evaluation of the companys long-term investment value. Enhanced market confidence: The stable lock-up period sends a clear signal to the market that cornerstone investors are bullish on the company in the long term, enhancing investor confidence and attracting more participation. For retail investors participating in IPOs: Decision-making reference for cornerstone investments: Retail investors, lacking the ability and resources for in-depth research, can use the participation of cornerstone investors as an important reference point when subscribing. The policy reduces the impact of short-term selling by cornerstone investors on stock prices, protecting the interests of retail investors. For listed companies and market management entities: Attracting long-term strategic investors: The 6-month lock-up period can attract strategic investors who are genuinely bullish on the company's long-term development to become cornerstone investors. Stabilization of initial listing prices: Cornerstone investors holding shares stable in the initial listing phase play a crucial role in supporting stock prices. 4. Adjustment of rules for initial public shareholding and free float shares The HKEX has adjusted the rules for initial public shareholding and free float shares to improve market structure and trading activity. - Greater diversity in listed companies and investors: Previously, regardless of company size, public shareholding was standardized, which was relatively rigid. Now, based on company market value size, tiered requirements for shareholding between 5%-25% bring more reasonable distribution. Large companies no longer have to dilute their shares too much to meet high public shareholding requirements and can better retain control, making them more willing to list in Hong Kong. This strengthens the lineup of large companies in the Hong Kong stock market. Lower barriers for small companies make listing easier and bring new vitality to the market, leading to a more rational mix of companies in the market, offering more choices for institutional investors and easier access for retail investors to participate in the market. - Enhances market liquidity: The new regulations require sufficient free float shares at the time of listing, either representing 10% of the total shares with a market value of not less than HK$50 million, or a market value of not less than HK$600 million. This acts as a lubricant for trading, making buying and selling smoother and reducing significant price fluctuations. In the past, some companies had high levels of control at the time of listing, with too few freely tradable shares, making them vulnerable to manipulation and causing abnormal price fluctuations. With the new rules, the difficulty of manipulating stock prices will increase, leading to more stable market trading. Overall, these reforms by the HKEX aim to enhance the efficiency, transparency, and stability of the IPO process and improve market dynamics for both institutional and retail investors, as well as listed companies and market management entities.