IPO Allocation, Stabilisation and a Connected Supplier Client
A Hong Kong IPO seeks to raise up to HK$2.0bn: 90% placing, 10% public offer and a 15% over-allotment option, with a price range of HK$8.00–HK$9.60. A cornerstone investor has agreed to take 30% of the deal at the low end, subject to a 6-month lock-up. The sponsor's parent company has a private-banking client that is also a major supplier to the issuer; the client wants a HK$100m allocation. The placing book is covered 8 times, but the public tranche is only 1.2 times covered. The issuer's controlling shareholder wants to sell 20% of the offer as secondary shares. The syndicate wants to allocate 40% of the placing to the top three investors to ensure 'stability' and to support the price after listing. Compliance asks about allocation, stabilisation and conflicts.
1. How should the syndicate deal with the HK$100m allocation request from the sponsor parent's private-banking client who is also a major supplier?
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The request is a conflict issue, not a routine allocation. The client is connected to the sponsor's parent and has a commercial relationship with the issuer as a major supplier. IPO allocations must be fair, documented and made under a syndicate allocation policy. Connected clients should not receive preferential treatment or an allocation that could be seen as rewarding the supplier relationship. The supplier relationship is also likely to be a related-party or connected transaction requiring prospectus disclosure and sponsor due diligence.
If an allocation is made, it should be at the same offer price and terms as other investors, justified by the client's investment mandate and order quality, and approved under the conflict policy. The private-banking and sponsorship teams should be information-barriered. The sponsor should disclose the relationship to the underwriters and ensure the allocation does not compromise independence. The cornerstone's 30% with a 6-month lock-up is permitted, but it reduces free float and must be disclosed.
2. Assess the public-offer clawback, the 15% over-allotment and the proposed use of stabilisation to support the price.
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The public tranche is only 1.2 times covered, so no clawback is triggered. Clawback depends on public-offer oversubscription thresholds, not placing demand. The 8-times placing book can be allocated within the deal size. The 15% over-allotment creates a short position that the stabilising manager may cover by buying shares in the market after listing, but stabilisation is subject to the SFC price-stabilisation rules. Purchases must not exceed the offer price and must occur within the permitted period. Stabilisation cannot be used to support the price above the offer price or to create a false market.
Allocating 40% of the placing to the top three investors may concentrate the register and create artificial demand. It should be justified by genuine orders and diversification policy, not by a desire to support the aftermarket. The controlling shareholder's secondary sale is subject to lock-up: normally six months, and a further six months if disposal would cause loss of control. The prospectus must disclose the sale, use of proceeds and lock-up.