Legco Financial Affairs
Panel Meeting on 2nd July, 1996

The Stock Exchange of Hong Kong (the "Exchange") at the request of the Financial Services Branch, has prepared the following information with respect to the offering mechanism of initial public offerings ("IPOs"). We apologise for having to table this paper at short notice but the Exchange was under the assumption that the matter could be the subject of an oral briefing.

Offering mechanism of IPOs

Hong Kong IPOs may be brought to listing by any one or more of the offering mechanisms described below:-

1. Public offer for subscription

- an offer to the public by or on behalf of an issuer of its own securities

2. Public offer for sale

- an offer to the public by or on behalf of the holders or allottees of securities already in issue or agreed subscribed

3. Placing

- a placing is the obtaining of subscriptions for or the sale of securities by an issuer or intermediary primarily from or to persons selected or approved by the issuer or intermediary.

4. Introduction

- an application for listing of securities already in issue where no marketing arrangements are required because the securities for which listing is sought are already of such an amount and so widely held that their adequate marketability when listed can be assured.

In view of the growing demand for global equity offering (the "Global Offering") which have become more common for large scale new issues in Hong Kong, the Exchange together with the Securities and Futures Commission ("SFC") issued a joint policy statement on the Global Offering mechanism in November, 1994 (the "Joint Statement").

The objective of the Joint Announcement was to introduce greater flexibility for the public distribution of securities in equity offerings while ensuring the interest of local investors are not disadvantaged by this approach. (a copy of the Statement is attached as Appendix 1 to this report).

Global Offering involve the tapping of funds from both the domestic and international markets. The general features of Global Offering involve both international and local offerings, book building, price range, claw-back, as well as over-allotment option.

(i) Tranches

Global Offering mainly involves two tranches, namely, International tranche and Hong Kong tranche. The International tranche would be by way of international placing to institutional and professional investors in Hong Kong and outside of Hong Kong, while the Hong Kong tranche would be by way of offer for sale and /or offer for subscription to public retail investors in Hong Kong.

(ii) Price Range

Sponsors to the new issues where Global Offering is used would usually introduce a price range. The price of the shares to be offered for the public tranche will only be fixed after the closing of the Global Offering. Applicants for the Hong Kong tranche are required to pay the maximum price of the range. If the offer price as finally determined is to be lower than that of the maximum price, appropriate refund payments will be made to each successful applicants.

(iii) Book - Building

The International tranche will be effected on a book- building basis. The underwriters would solicit indications of interest from prospective investors who are required to specify the number of shares they would be prepared to acquire at different prices or at a particular price per share, which is within the proposed price range.

(iv) Claw-back

Pursuant to the Joint Statement where the interests of local investors will not be disadvantaged, the sponsors would usually introduce a claw-back arrangement such that when the Hong Kong tranche triggers a certain times of over-subscription, there will be a claw-back of up to a maximum of certain percentage from the International tranche to the Hong Kong tranche.

If there is an under-subscription in Hong Kong, the sponsors have the authority to reallocate all or any portion of the shortfall to the International tranche in such proportions as the sponsors deem fit so that to ensure that all the shares are subscribed.

(v) Over- allotment

The issuer would usually grant the underwriters an over-allotment option (also called as green shoe option) of up to 15% of the size of the Global Offer which is exercisable for 30 days after the date of the prospectus and will require the issuer to issue new shares up to an aggregate of 15% of the shares in the Global Offering to cover over-subscription in the International tranche. If the over-allotment option is exercised, any allocation to the International tranche will be made at the sole discretion of the sponsors.

To remind the market and the general public of the objectives and the policy with regard to Global Offering mechanism, the Exchange and the SFC issued a joint announcement on 1st July, 1996 (the "Joint Announcement"). (a copy of the Joint Announcement is attached as Appendix 2 to this report).

For details of new listing requirement, please refer to Appendix 3 as attached to this report.

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