Industrial and Commercial Bank of China’s (ICBC’s)
recent IPO was not only the largest ever, raising
over US$21 billion, but it was also the first simultaneous
offering of H-shares, listed on the Hong Kong stock
exchange (HKSE), and A-shares, listed on a PRC
domestic exchange (Shanghai, the SSE).

Previous proposed simultaneous offerings had
either dropped the A-share offering at a late stage
or proceeded with a staggered offering.

PRC regulatory restrictions on who can purchase
H-shares (non-PRC nationals) and A-shares (PRC
nationals, foreign strategic investors and qualified
foreign institutional investors) mean that A- and
H-shares are not fungible. Although both are
ordinary shares of the same par value in the same
issuer, they are marketed to separate markets.
This distinguishes the A+H model from other dual
listings (for example in Hong Kong and New York)
where, even if the second listing is of depository
shares, the underlying security is the same and
valuations are linked.

Conditionality and structure

An A+H offering structure should consider
not only the market demand in the PRC
domestic and international markets but also
whether it is possible to meet the SSE and the
HKSE’s public float requirements. Linked to this
is the question of whether the offerings should
be interconditional. In a typical dual listing, the
Hong Kong public offering and the international
offering would be interconditional. It is unlikely
that the A+H model would be structured in this
way given issues such as: (i) pricing, (ii) the
comparative size of the two offerings (maintaining
their independence affords greater flexibility),
and (iii) disclosure considerations.

Under the HKSE listing rules, the standard
Hong Kong public float requirement is 25%, but
companies with a Hong Kong market capitalisation of
at least HK$10 billion (US$1.2 billion) may seek the
HKSE’s consent for a lower threshold between 15%
and 25%. For smaller cap companies, the HKSE
listing rules would allow the 25% threshold to be met
by the combined public float of the A and H offerings,
provided the H portion represented at least 15%.
However, this would make the H-share offering
conditional upon the A-share. The norm for Shanghai
is 10% for companies with a total issued share
capital of Rmb400 million (US$50 million). A lower
threshold would require a waiver from the China
Securities Regulatory Commission, the PRC
securities regulator, and might result in the A-share
offering becoming conditional upon the H-share.



The price discovery and determination process for
a Hong Kong listing usually follows international
practice of pre-marketing and bookbuilding.
Bankers from the lead managers of the offering
conduct pre-marketing through meetings with
potential institutional investors, who will usually
have received independent research reports from
lead managers and other syndicate members. The
pre-marketing will yield an initial price range for the
offer. The bookbuilding takes place on the back of
a marketing roadshow conducted by the issuer to
build a book of orders at varying prices through
which the final price can be determined.

The price discovery and determination
process for a PRC listing, however,
follows a set of regulated procedures set
out in the Administrative Measures on the
Issue and Underwriting of Securities
issued by the Commission. Under these
measures, the economic drivers behind
the process are similar to the convention
adopted in a Hong Kong listing. Under
the PRC model: 

  • only institutions that fulfil certain criteria
    and listed on the register maintained by
    the Commission may participate in the
    price discovery process. 
  • at the time of the ICBC transaction
    the lead underwriters were expected
    to publish pre-deal research reports
    when the price discovery process
    commenced, and the issuer of the
    report had to include a forecast of the
    secondary market A-share valuation.
    For the A+H model, a waiver was
    sought to dispense with this
  • only institutions that have participated
    in the price discovery process may take
    orders in the final book.
    Despite their differences, both processes
    aim to price according to true demand in
    their respective markets. But the A+H
    model has not evolved from a market
    imperative. Valuations in the A-share
    market over the last five years have been
    volatile. Pricing in the A+H model will
    need to strike a balance between market
    demand and the need to be seen to treat
    A- and H-share investors equally through
    pricing parity.

Offering documents

The A+H model, comprising offerings of
different classes of shares, will require
separate offering documents to meet the
requirements of the PRC regulators for
the A-share offering and the HKSE and
Hong Kong Securities and Futures
Commission for the H-shares. Although
they are, on a strict interpretation,
non-interconditional offerings, logic and
legal considerations will dictate the same
disclosure in both offerings. Disclosure
should be largely identical in respect of
the same subject matter and neither
offering document should contain
material information that has been
omitted from the other. Within this
principle, there might be variations on
account of form and in substance to
comply with particular local regulatory
requirements and local practice. Where
these requirements give rise to material
disclosure this will need to be addressed
through incorporation in the other offering
document or a waiver of the requirement
by the relevant regulator.

The timing of prospectus publication
gives rise to several issues in the A+H
model. Before the PRC listing hearing,
a pre-disclosure proof of the prospectus
must be posted on the Commission’s
website. The PRC requires the final proof
of the prospectus (called the pathfinder
proof) to be posted publicly on the
Commission’s website immediately after
the PRC listing hearing. Any change, no
matter how trivial, may only be effected
by public announcement. This must be
factored into the preparation time for the
H-share document, which would usually
only be considered final with the printing
of the red-herring proof. According to
normal practice in staggered offerings,
the H-share red-herring proof would
appear much later in the process than the
A-share pathfinder prospectus. Unless
there is a change in the A-share practice,
the red-herring proof H-share document
will need to be finalised much earlier than
usual to avoid the need to publish and
highlight changes in relation to the
A-share pathfinder proof.

The early publication of the A-share
documents in the PRC, which are
accessible globally through the internet,
heightens the sensitivity of the Hong
Kong regulators to the fair treatment of
retail investors (the Hong Kong public) in
respect of equal access to information.

Policy changes are under way in Hong
Kong to require issuers to publish a
red-herring draft of the prospectus to
place retail investors on an equal footing
with institutional investors, who usually
have access to research reports as well
as the red-herring prospectus.
Information regarding the issuer in Hong
Kong will need to be published on the
HKSE website at the same time the
pre-disclosure proof is published. Given
Hong Kong’s current legal environment,
prominent health warnings and controlled
accessibility would be needed and the
content would have to be prepared to
registered prospectus standard.
Overcoming the challenges of meshing
two different regulatory systems, ICBC
has succeeded in creating an A+H model
precedent. It is likely that this will be a
path to be trodden by other issuers in the
near future. However, the success of the
ICBC precedent, besides being testimony
to the efforts of management and
advisers, also owes something to the
spirit of cooperation between regulators.

In other market conditions and in the
absence of regulatory changes
specifically accommodating the A+H
model, a less high-profile issuer may
struggle to follow in ICBC’s footsteps.