[HONG KONG] Hong Kong's exchange backed off from a proposal to double or even triple the annual profit requirement for companies seeking to sell shares on its main board following opposition from banks.

The threshold will instead be raised 60 per cent to HK$80 million (S$13.7 million) in the recent three financial years, effective starting next year, according to a statement released on Thursday. The exchange had proposed more than doubling or tripling the level.

The bourse and the Securities and Futures Commission also issued a joint statement vowing to crack down on suspicious IPO activities such as inflating the market capitalisation, executing "ramp-and-dump" schemes and unusually high underwriting commissions.

"We are committed to upholding and enhancing market quality as well as to promoting investor protections," said Bonnie Chan, HKEX's head of listing, in the statement. "Robust gate keeping, together with targeted post-listing regulation, are crucial in achieving this, providing more clarity and transparency to the market on our regulatory and enforcement responsibilities." The proposal had intended to address concerns that smaller firms were overstating earnings to get approval. These firms were seen as hotbeds for share price manipulation and insider trading, and have been at the centre of some high profile fraud cases and investigations.

The financial regulator, the SFC, had said the higher requirement could help stamp out some the city's murkier trading practices. But the move had been met with opposition from the financial hub's banks, leading to the current softer plan.

HKEX has estimated that the higher earnings minimum would have stopped 62 percent of the 745 applications it received from 2016 to 2019.

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"This not only adversely affects these potential issuers, but also the local financial advisers, legal practices and accounting firms who act for them, as well as other businesses such as printers and translators," law firm Charltons had said in a response on behalf of 10 Hong Kong IPO sponsoring banks.

The bourse reported a record quarterly results in the first quarter amid a boom in stock listings. Chinese firms such as search engine Baidu and streaming platform Bilibili have flocked to the city amid eased rules and tension over their ability to stay listed in New York.

In a joint statement, the bourse and the regulator outlined several areas of suspicious activity when it came to IPOs. Problematic listing applications will now be "subject to heightened scrutiny" and risk being rejected, they said.

The regulators pointed to a lack of transparency in the share placement and price discovery process. Some requirements were also satisfied by artificial means, such as allocating shares at an inflated IPO price to satisfy the current minimum Main Board market capitalization requirement of HK$500 million. In other instances, shares were cornered to enable market manipulation after listing. The regulators also this year have found "unusually high underwriting commissions," reaching 20 per cent of IPO proceeds, compared with an average of 12 per cent in 2020.

BLOOMBERG