In the Hong Kong IPO market, highly popular and heavily oversubscribed new listings often trigger what is known as the “clawback mechanism.” For retail investors participating in IPO subscriptions, clawbacks not only affect the chances of allocation but also serve as an indicator of market sentiment and the potential performance of the new stock.

Simply put, the clawback mechanism is a dynamic allocation adjustment tool designed to improve IPO efficiency and balance the interests of institutional and retail investors. During the IPO process, issuers follow pre-set rules that allow them to adjust the allocation ratio between international placement (institutional tranche) and public offering (retail tranche).

If retail demand is strong and oversubscription thresholds are met, the mechanism automatically triggers an oversubscription clawback, shifting more shares from institutional placement to the retail portion. Conversely, in cases of weak demand or under-subscription, issuers may initiate a discretionary clawback to ensure the offering proceeds smoothly.

Clawback Mechanism Under Full Subscription

In new share offerings, when retail investor demand is strong and the public offering becomes oversubscribed, it may trigger the automatic clawback mechanism under full subscription. Typically, 10% of the total IPO shares are allocated to the public offering, while the remaining 90% are placed with institutional investors through the international placing, maintaining a 1:9 ratio. However, when retail subscription multiples exceed certain thresholds, the issuer reallocates a portion of the shares from the institutional tranche to the retail tranche, following pre-defined rules.

Specifically:

If the oversubscription is 15 times or less, no clawback is triggered, and the allocation remains at the standard 10% retail / 90% institutional ratio.

If the oversubscription is between 15 and 50 times, a moderate clawback is applied, with the retail portion increased to up to 30% of the total offering.

If the oversubscription is between 50 and 100 times, the retail allocation may increase up to 40%.

If the oversubscription exceeds 100 times, the maximum clawback is triggered, and the retail tranche can be expanded up to 50% of the total offering — the typical upper limit for most IPOs.

It’s important to note that high-profile or large-scale IPOs ("star companies") are often allowed to set more flexible clawback arrangements, and may not strictly follow the standard thresholds outlined above.

Clawback Mechanism Under Under-Subscription

In new share offerings, the clawback mechanism under under-subscription differs significantly from the automatic clawback triggered by oversubscription. It is a discretionary move initiated by the issuer or the bookrunner (underwriter) to ensure the success of the IPO.

Specifically, when the international placing (institutional tranche) is under-subscribed, but the public offering (retail tranche) is fully or slightly over-subscribed, the issuer may choose to reallocate up to 20% of the shares from the international tranche to the public offering, provided the IPO is priced at the lower end of the price range.

From a strategic perspective, this discretionary clawback often reflects one of two underlying motives:

1. Institutional Undersubscription + Mild Retail Oversubscription:

This is a typical case of what is sometimes called a "tactical clawback." The lack of interest from institutional investors may indicate doubts about the company's valuation or growth potential. Yet, the issuer still reallocates up to 20% of shares to retail investors to ensure the offering is completed. This approach may be viewed as a "cash grab," and with the absence of institutional backing, such IPOs tend to carry a higher risk of first-day share price drops.

2. Institutional Undersubscription + Strong Retail Oversubscription:

In this scenario, although the institutional tranche is weak, retail demand is robust. The 20% discretionary clawback serves as a symbolic response to strong public interest. However, given the high level of oversubscription, the additional allocation is often insufficient to meaningfully increase the chance of allotment. The benefit of this strategy is that retail investors receive limited shares, reducing potential selling pressure on the first trading day and helping stabilize the stock price. If the stock performs well post-listing, it may even create a positive feedback loop.

A Rarer Case: Institutional Fully Subscribed + Retail Undersubscribed

This scenario is less common. If the retail tranche is under-subscribed while institutional demand is strong, the issuer may choose to reallocate a portion of the retail shares back to the institutional tranche—a reverse clawback. However, this strategy carries risk. If not executed carefully, it may result in under-subscription on both sides, which can lead to a failed IPO, unless the underwriter is willing to fully underwrite the unsold shares.