Hong Kong Stock Exchange - Essay Example

HONG KONG STOCK EXCHANGE – LISTING – PROBLEM QUESTIONS Listing Requirements for Main Board Listing in the Hong Kong Stock Exchange. As per Hong Kong Stock exchange Limited listing rules, a new applicant should demonstrate that it is having a trading record of not less than 3 financial years and to meet any one of the under mentioned three financial yardstick. The company that is going to be incorporated or otherwise must be incorporated under the laws of the place where it has been registered and must be in tune with those laws and should have a memorandum and articles of association or analogues documents. If the company is registered in Hong Kong, then it should not be a private company within the ambit of the section twenty nine of the Companies Ordinance. In the given problem, though, the place of incorporation of “Beauty Care Ltd or BCL “is not given, it is assumed that it has been incorporated in a valid jurisdiction. Hence, it is assumed that it is not a private company incorporated in Hong Kong and a company registered elsewhere, which is suitable for listing in Hong Kong. Profit litmus test: The issuer must have ample trading past track record and should fulfil the following: It should have a past trading record in the last three financial years and its net profit after taxes but before dividend should not be lesser than HK $ 20,00,0000 and in respect of the last two financial years, it should not be lesser than HK$ 30, 00,000. In the last three financial years, a minimum of HK$50 million should have been reported as profit. There should not be management discontinuity at least in the last three past financial years. There should be ownership control and continuity in the immediate preceding audited financial year. The Cash flow test / the market capitalisation / revenue An applicant who wishes to list his shares in the Hong Kong Main Stock Exchange has to comply with the following also: 1. An applicant with the past trading activity for at least three financial years 2. There should not be any breakdown in the continuity of management in the preceding three financial years. 3. There should be minimum revenue of HK$ 500,000,000 for the just concluded audited financial year. 4. There should be a minimum of market capitalisation of HK$ 2,000,000,000 at the juncture of listing. Revenue / the Market Capitalisation Test Each of the following conditions has to be satisfied by a new applicant, unless the same is waived by the Hong Kong Stock Exchange authorities. All the above three conditions stated as 1, 2& 3 as above. At least it should have minimum 1000 shareholders at the time of listing. The main board listing requirement demands the following: At least twenty five percent of minimum paid-up capital should be controlled by at least not less than one thousand public shareholders. It is to be observed that above mentioned minimum number of public shareholders shall exclude any employee holdings of the company. However, up to five percent holdings held by employees is permitted to comprise of the twenty-five percent public shareholding spread. Regardless of method of floatation, the company must publish a prospectus and should advertise the prospectus in complete. (Tan 2000:34). The following is the procedure for the listing in the Hong Kong Stock Exchange: In any of the following methods, equity of a company can be listed in the HKSE. Offer of share for subscription- A new issuer may offer its share to general public through initial public offering. Offer for sale- Either the Allottees or holders of an equity who have already subscribed or issued can offer their holdings to the public. By a method of placing – the sale of securities or obtaining of subscription by an intermediary or an issuer mainly to persons approved or selected by the intermediary or the issuer. By the introduction listing of securities already issued where no marketing arrangements are needed since the securities for which listing is sought are already of such an amount and so widely held that there is enough marketability. BY an open offer: By this process, an offer is made to the present shareholders to subscribe for additional securities in the ratio to their existing shareholding. By other methods like exercise or exchange of warrants, options or analogues privileges to subscribe for or purchase of shares. Beauty Care Limited (BCL) has to submit an application for listing its shares and it has to go through the formalities of the dual vetting and filing process by both the SFC and HKSE. However, in case if the application is made to HKSE only, then it will forward a copy to SFC. Further, HKSE will be the front-end communicator for the purpose of listing. (Soulier & Best 2005:200). Further, the listing document of an overseas issuer who wishes to have a primary listing in Hong Kong should furnish a summary of the specific regulatory statutory rules or otherwise of the overseas issuer’s regime where it has been incorporated. If BCL wants to have a secondary’s listing, the Hong Kong Stock Exchange would demand a synopsis of relevant regulatory conditions, which is applicable to an overseas company which is listed in the overseas stock exchange like BCL. In case of secondary listing by an overseas company, Hong Kong stock exchange may demand either any additional details or annul or modify certain existing rules to them. (Campbell 2008:122) Further, if there is a pivotal public demand for a specific security, the Hong Kong stock exchange may not authorise a new aspirant to be listed through the method of placing. A mixture of a private placement and a public offer will be permitted in case of applicants who have large market capitalisations. BCL wishes to list in the “Main Board of the Hong Kong Stock Exchange.” Wampow, the holding company of BCL is desirous of selling its 49% of its shares in BCL to institutional investors and to the public and the listing in the “main Board of HKSE” is being sought. At this juncture, as a legal advisor, I wish to advise that BCL should offer at least twenty five percent of its shares unloaded by Wampow to the public of Hong Kong. It is mandatory for listing in the “main board of the stock exchange of Hong Kong”, the issuer should have at least offered a minimum of twenty –five percent to the public. Hence, I wish to advise the management of BCL in addition to the following above said procedures, it is necessary to off load at least twenty five percent of BCL shares to the public for the purpose of listing. (2) Disclosure of Price-Sensitive Information A listed company should divulge its entire price –sensitive information to HKSE and to the public. Thus, price sensitive information includes probable price-sensitive information also that is likely to happen in the near future also. HKSE listing rules insist that for efficient functioning of the market through accurate and timely public disclosure of price-sensitive information is essential. Hong Kong Stock Exchange listing rules require only a minimum mandatory disclosure requirement. So as to promote transparency, fairness, responsibility and accountability, board of directors should disseminate the necessary information if they deem that such information is significant and has to be divulged suitably to the general public. Thus, disclosures should be intended at offering both the public and the shareholders with proper information and data on an even and timely basis. Thus, timely disclosure of quality and accurate information to investors will always give first-rate ranking to the so called translucent companies. A listed company may witness significant and unexpected events, which may influence or impact prices and market activity. It is thus essential for the issuers to a prompt evaluation of the possible effect of these incidents on their share activities / prices and to come to a conclusion, whether the specific information would amount to price-sensitive, and whether it is necessary to be divulged. If it warrants, the company should make a request a temporary suspension in the dealing of its shares till an official announcement is made. This includes Signing an important contract An event which has material significance of a company’s operations, business or financial performance. It is the moral obligation of the company to disclose both negative and positive price sensitive information to the public. In short, the following precaution should be observed in case of price sensitive information. Price sensitive information should not be revealed outside its advisors and issuers, which may place any person in a privileged status. The price sensitive information should be kept highly confidential if the directors feel that it may have a poignant impact on the share prices. Since price sensitive information is to be divulged instantly as it is a subject of a decision and timing in such a scenario will be more crucial. (Smith 2009: 8). Since, Cement Ltd is a company listed on the Hong Kong Stock Exchange. Both Cement Ltd and Builders (China) Ltd are likely to sign a long term cement supply contract which will definitely have an impact on its profitability in the coming years, Since, Cement Ltd is able to put in place satisfactory arrangements for transportation to main land and the managing directors of the two companies have agreed orally on price setting arrangements, tonnages and delivery arrangements, duration of supply arrangements and all other key commercial terms, this is really a price-sensitive information. Further, in-house lawyers for both the companies have prepared a draft agreement and have agreed on all legal technical matters. Rule 13.09 of the listing rules of HKSE highlight the significance of confidentiality and hence directors of both the companies to take cognisance of the principles elucidated therein. It is to be noted that the notes to the rule do, however, recognise that there may be some restricted scenarios where dissemination of potentially price-sensitive to the third party or external is permitted. For instance, such scenarios may include dissemination under the pretext of law or either during the course of a contractual conciliation subject to severe checks on its disclosures. However, an announcement under Rule 13.09 may be delayed mainly to maintain the confidentiality and when there is a loss of confidentiality, and then it will give rise to an instant dissemination duty. If the copy of the agreement is given to external lawyers of either side, it should be ensured that the external lawyers should maintain the confidentiality. Further, both the companies should take steps to ink the agreement at the earliest. Immediately, after inking the agreement, Cement Ltd has the onus to a disclosure obligation under Listing Rule 13.09. (3) Critically comment on the proposed amendments on statutory patronage for the listing rules as set out in the “SFC’s Consultation Conclusions on Proposed Amendments to the Securities and Futures (Stock Market Listing) Rules, Feb 2007.” There is a general concern raised by vested interest that the current listing rules of Hong Kong Stock Exchange are short of policing authority and penalties. To remove this barrier, Hong Kong government has introduced the following two initiatives. “The Securities and Futures Commission (SFC) “was established under the Securities and Futures Ordinance (2003) as an independent statutory body. SFC has been vested with a wide extent of authority to deal with securities and futures markets in Hong Kong by efficient guidance and regulations. (Tohmatsu 2009: 26). Further, the Hong Kong government, from 2005, onwards has been in discussion to offer statutory back up to some of the non-statutory listing rules of HKEX. The original proposal is to expand sanctioning regime on market misconduct. However, some concern is raised by the business community over the harsh sanctions for minor violations, and it is being alleged that the envisaged statutory rules were exaggeratedly featured. During February 2007, the Securities and Futures Commission (SFC) announced the revised approach which is endeavoured at flexibility and clarity. As a measure of introducing statutory backing, the listing rules are to be embodied into legislation thereby spotlighting on continuing prime disclosures, endeavouring to make sure that investors are able to get timely, accurate and sufficient information so that they can make well informed decision. These anticipated alterations have been aimed at focus on publication of price-sensitive information, release of periodical financial statements and obtaining of shareholder’s approval of some transactions. SFC has been entrusted with responsibility for handling discipline and investigation issues including disputes and complaints and is toothed with the authority for inspection of records and books of any registered company and to carry on special investigations as demanded by any issues involved with securities. Its enforcement division is entrusted with monitoring and supervising activities of the clearing houses and exchanges thereby promoting development of the futures and securities markets thereby developing and promoting self-regulations.( Kwok 2008 :10) The aforesaid regulations will be scrapped from HKEX listing regulations, mainly to avert duplication. Further, the enforcement will be hither after assigned to SFC from the HKEX. However, the proposed amendments will not alter the following: As regards to disclosures to be made in IPO prospectus, the HKSE will act as the nodal regulator. The regulations as regards to law pertaining prospectuses which are presently governed by Companies Ordinance will remain unaltered. The envisaged strategy is having three stages: SFO will have broad general norms in the form of statement of standards as desired by the market and the fortitude behind the listing rules. A schedule to SFO will make sure that statutory requirements are adequately particularised, which will include exemptions, definitions, etc. SFC will have a voluntary compliance of Listing Code, which will include exhaustive and technical provisions concerning three provinces subject to statutory backing. SFC has reiterated that it will not make any massive changes to the present listing rules. One another move is to shift away from compulsory pre-vetting of disclosure material as demanded under the existing Listing Rules which should fasten market disclosures. The changeover to the new regime will be made easy through voluntary pre-vetting. Impacts of non-compliance With statutory backing, SFC has the authority for the enforcement action for infringement of the fundamental principles. At the same time, for minor infringement or for fewer technical violations which will have no significant harm to the market, lesser statutory liability will be imposed. Infringement of general principles will be now considered as a market misdemeanour and will be attracting both significant fines and probable criminal liability.SFC will be toothed with authority to punish the reckless or intentional infringement of listing codes and where substantial damages have been caused to investors. The Securities and Futures (Amendment) Bill will contain the envisaged alterations to the SFO and the listing rules to be brought out by SFC will also include the suggestions from the public. Though the implementation of these reforms is still to be carried out, but it seems more certain. Thus, statutory backing and the proposed amendments will compel the listed issuers to have a closer scrutiny of their disclosure commitments and the prospect of tighter sanctions if they fail to observe. (Alder& Cardno 2009). List of References Alder, Ashley& Cardno, Nicky. (2009). Statutory Backing for the Listing Rules- A Revised Approach. Asian Legal Insights. Campbell, Editor Dennis. (2008). International Securities Law and Regulation 2008. Volume 1. London: Lulu Publishing. Kwok, Benny K.B. (2008) Financial Analysis in Hong Kong. Hong Kong: Chinese University Press. Smith, Herbert. (2009) Compliance Guide For Companies Listed on the Hong Kong Stock Exchange. [Online] available from http://www.herbertsmith.com/NR/rdonlyres/1F687F84-4635-42A2-AC6B-24B232705DE5/10768/ComplianceguideforcompanieslistedontheHongKongStoc.PDF [accessed 17 February 2010] Soulier, Jean –Luc & Best Marcus. (2005). International Securities Law Handbook. Hong Kong: Kluwer Law International. Tan, Chwee Huat. (2000). Financial Source Book for South East Asia and Hong Kong. London: World Scientific Foundations. Tohmatsyu, Deloitte Touché. (2008). Financial Reporting in Hong Kong. Hong Kong: CCH Hong Kong Ltd. Read More