Monday, August 29, 2005

Hong Kong Moves to Stop Leaks Of Analysts' Pre-IPO Research

By KATE LINEBAUGH Staff Reporters of THE WALL STREET JOURNAL August 29, 2005

HONG KONG -- In an effort to prevent research reports published ahead of Hong Kong initial public stock offerings from landing in the hands of individual investors, regulators are giving the market a choice: Stop writing them or face sanctions.

Neither option is apt to appeal to underwriters, which argue that such "predeal research" is vital to finding an acceptable offering price for the billions of dollars of stock issuance that flows into Hong Kong's market, especially from opaque Chinese companies.

At the same time, information in those reports sometimes is published by the city's media, raising concerns that individual investors could be making decisions based on analysts' projections rather than on a company's legal document, the prospectus.

While any decision is unlikely until next year, the move to set distribution regulations highlights how financial-market regulators world-wide are grappling with rules for research dissemination three years after the landmark settlements between U.S. regulators and securities firms over abuses.

The debate is notable in Hong Kong, an attractive listing venue for huge Chinese offerings when arduous regulations in the U.S. have deterred some foreign companies from listing there. For instance, China Construction Bank, the country's third-biggest bank by assets, is seeking to raise $5 billion in an IPO in Hong Kong expected in October and won't be listing its shares in the U.S.
Hong Kong's market regulator today will present proposals to enhance investor protection, including how to handle predeal research, according to people close to the regulator.

What Hong Kong's Securities and Futures Commission will suggest, they said, is either to ban all written predeal research, as the U.S. does, or to continue to allow the distribution of the reports to institutional investors but with one caveat: If information from the reports makes its way into the news media, the entire report will have to be made public by the underwriter. The company that is offering shares also will have to make a statement about the report in its prospectus. Companies now don't have to comment on analysts' forecasts.

The SFC, as the regulator is known, will give the market about three months to respond to policy recommendations. It will make a decision next year.

Because such pre-IPO reports are generated by analysts at the underwriters, who have exclusive access to the companies, they can contain insights and often are the most comprehensive information available to investors until the prospectus is issued a few weeks later. In many cases, such reports offer the analysts' own profit projections. But they also tend to be upbeat about a company's prospects.

As the SFC can't stop the media from publishing, it is trying to find the most effective way to restrict that information from getting into the pages of Hong Kong newspapers and onto TV financial shows.

Many bankers who work on IPOs say predeal research is essential to finding an acceptable price. In Hong Kong, information about many of the companies that are listing shares often is limited. Analysts from the underwriters, given privileged access to the companies, crunch the numbers to create a valuation profile and comparison of companies globally that helps bankers open price discussions with their institutional clients.

At the same time, when the research hits the news pages, it creates a legal to-and-fro between the underwriter and the regulator that an outright ban would eliminate. It is a headache many bankers who work on these transactions say their business would be better without.

Each market has a different policy. The U.S., Japan and Canada have imposed an outright ban on predeal research. In Europe, regulators allow it and on big privatization deals that target small investors, some underwriters have done reports aimed at the retail market. Singapore's regulators have eased rules so some predeal research on international listings can be distributed to the city-state's professional investors.


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