Title: Enhancing the Quality of Primary Market in Hong Kong
1Enhancing the Quality of Primary Market in Hong
Kong
- Paul Chow
- Chief Executive, HKEx
- 20 November 2004
- Conference on Asia's Financial Centre
Challenges Opportunities - Canadian Certified General Accountants
Association of Hong Kong
2Agenda
- 1. Hong Kong Securities Market
- 2. Recent Initiatives in Enhancing Quality of
Primary Market - 3. Conclusions
3Global situation analysis Fundamentals of a
securities market
4Regulatory framework Listed companies in HK are
governed by a 3-tier regulatory system
Roles
Checks balances
- Set overall policy direction
- Initiate legislation
- Executive Council
- Legislative Council
Government
- Statutory regulator
- Market watchdog
- Administer the Codes on Takeovers and Merger and
Share Buybacks - Regulate HKEx
- License sponsors and IFAs
- Process Review Panel
- Securities and Futures Appeals Panel Tribunal
- Independent committees panels
- Judicial review
- Review by Independent Commission Against
Corruption (ICAC)
SFC
- Frontline regulator
- Public organisation
- Business entity
- Administer the listing rules
- Administer trading/clearing rules (for market
operations)
- Oversight by SFC (via SFO various MOUs)
- Balanced board structure
- Independent Listing Committee and Listing Appeals
Committee - Independent committees panels
- Judicial review
- Review by ICAC
HKEx
5HKExs Listing function Safeguard measures
ensure checks and balances
Safeguard measures
Description
- HKEx shall give precedence to the public interest
over its own interests - Appointment of HKEx Chairman (elected by HKEx
Board) requires approval of CE of HK SAR - Appointment of HKEx CE (appointed by HKEx Board)
requires approval of SFC - All HKExs fees and charges relating to listing
activities and new and amendments to listing
rules require approval of SFC - SFC has power to give directions to HKEx if it
deems appropriate (SFC needs to consult with FS
in cases of issuing restriction notices and
suspension notices ) - SFC can introduce and make amendments to any
listing rules after consulting FS and HKEx
SFO
- Listing application materials submitted to SEHK
are also filed with the SFC - The SFC has the power to make comments on and
object to a listing application
Dual filing
6HKExs Listing function Safeguard measures
ensure checks and balances (contd)
Safeguard measures
Description
- SEHK has delegated all its listing decision
making powers to the Listing Committee (LC)
assisted by the Listing Division - LC approves new listing applications, new and
amendments to policies and the cancellation of
any listing - Independence of LC is secured by the Listing
Nomination Committee, on which HKEx and SFC are
equally represented - Continuous oversight by SFC of HKExs performance
of its listing responsibilities, including
monthly reporting, monthly liaison meetings and
periodic audits
MOU on Listing Matters
- A Conflict Committee is established to review any
situation where concerns are raised that HKEx may
have a conflict of interest - HKEx as a listed company is regulated by SFC, not
by SEHK
MOU for the Listing of HKEx
- All board members (except HKEx CE) are INEDs (as
confirmed by SFC) - Government appoints 6 Public Interest Directors
and shareholders elect 6 Directors
Balanced Board
7Hong Kong securities market has 2 distinct
characteristics
Implications
- Agency problem not a substantial issue
- Connected party transaction a potential issue
- INEDs may not be truly independent if appointed
by major shareholders
Highly concentrated corporate ownership
- Difficult to deal with misdemeanours due to
separate legal systems - Difficult to undertake investigations if
individuals and evidence are located outside home
jurisdiction
Many non-Hong-Kong-based companies
8Hong Kongs solution is to adopt a primarily
disclosure-based regulatory regime
Elements of the disclosure-based regulatory
regime in Hong Kong
- Companies allowed to list if comply with
requirements stated in the Listing Rules - Quantitative requirements - profit track record
- Qualitative requirements - appropriate management
experience suitability of business
Listing criteria
- Listed issuers obliged to maintain adequate
procedures, systems and controls to enable them
to comply with the Listing Rules - Directors obliged to understand their
responsibilities under the Listing Rules - Timely accurate information dissemination
Continual obligations of listed issuers
directors
- Disclosure-based regime up to market to judge
the quality of listed issuers - Competence of preparers of financial information
and auditors - Sufficient powers available for regulators to
pursue and invoke effective sanctions for
wrongdoings post event
Quality assurance
9Agenda
- 1. Hong Kong Securities Market
- 2. Recent Initiatives in Enhancing Quality of
Primary Market - 3. Conclusions
10Hong Kong has undertaken a number of key CG
initiatives recently
2004
2005
Mar
Apr
Oct
Jan
1. Amendments to Listing Rules relating to CG
issues
3. Enhancing the Regulation of Listing
5. Strengthening regulation of sponsors and IFAs
4. Enhancing regulation of the accounting
profession
- HKEx issued amended rules on 31 Jan 2004
- Effective on 31 Mar 2004
- Government Consultation concluded on 26 Mar 2004
- Implementation in progress by Government, SFC
HKEx
- HKEx SFC published Consultation Conclusions on
19 October 2004 - Phase 1 completed
- HKEx published rules amendments on 19 October
2004 - To be effective on 1 Jan 2005
- Phase 2 to be completed by the SFC
- FSTB proposed the establishment of IIB and FRRP
- Government, SFC, HKICPA and HKEx agreed to fund
IIB and FRRP
2. Revised Code on CG Practices CG Report
- HKEx issued draft amended rules on 31 Jan 2004
- Finalised rules published on 19 Nov 2004
- To be effective on 1 Jan 2005
111. Amendments to Listing Rules related to CG
issues
Key elements
- Increase number of INEDs from 2 to 3
- Require at least 1 INED with appropriate
professional qualifications/accounting/related
financial management expertise - Require to set up Audit Committee
- Comprise NEDs only majority INEDs
- Minimum 3 members
- At least 1 INED with relevant financial
management expertise - Chaired by an INED
Directors senior management
- Mandate disclosure of individual directors
remuneration on a named basis - Enhance Listing Rules provisions on notifiable
transactions and connected transactions - Quarterly Reporting for MB issuers NOT required
Disclosure
121. Amendments to Listing Rules related to CG
issues (contd)
Key elements
- Require subsequent refreshments of general
mandate be subject to independent shareholders
approval - Extend voting by poll to connected transactions
and transactions that require controlling
shareholders to abstain from voting
Continuing listing obligations
- Introduce alternate financial standards to the
profit requirement - Market capitalisation/revenue test
- Market capitalisation/revenue/cash flow test
- Increase minimum number of shareholders required
of MB issuers to 300 - Increase required minimum number of shareholders
to 1,000 for applicants under market
capitalisation/revenue test
Initial listing obligations
132. Revised Code on Corporate Governance Practices
Corporate Governance Report (contd)
Key elements
Structure
- Make reference to UK Combined Code
recommendations by SCCLR - Consist of two tiers of compliance
- Code Provisions - require to comply or explain
non-compliance in CG Report - Recommended Best Practices - compliance
encouraged but disclosure of non-compliance
voluntary - Contain 5 sections covering
- Directors
- Directors remuneration
- Accountability and audit
- Delegation by the Board
- Communication with shareholders
142. Revised Code on Corporate Governance Practices
Corporate Governance Report (contd)
Key elements
Code provisions examples
- Hold Board meeting on a quarterly basis
- Separate roles of chairman and chief executive
officer - Establish a remuneration committee a majority of
the members should be INEDs - Conduct a review of the effectiveness of the
system of internal control - Explain the procedures for demanding and
conducting a poll by the Chairman
152. Revised Code on Corporate Governance Practices
Corporate Governance Report (contd)
Key elements
Recommended best practices examples
- Arrange appropriate insurance cover in respect of
legal action against its directors - Appoint INEDs representing at least one-third of
the board - Establish a nomination committee, a majority of
the members of which are INEDs - Directors should participate in a programme of
continuous professional development - Disclose details of any remuneration payable to
senior management on an individual and named
basis - Disclose the division of responsibility between
the board and management
163. Enhancing the Regulation of Listing
Key elements
Codification of certain Listing Rules in statue
- Proposed statutory-backed Listing Rules include
- Regular financial reporting obligations of listed
companies - Disclosure obligations in relation to corporate
transactions (particularly connected
transactions) - Obligation to disclose price-sensitive
information - To be enforced by SFC
- Publish SFCs annual audits of HKExs performance
of listing functions - Implement measures to enhance transparency of
listing decisions (e.g. Listing Committee Annual
Report, issuance of decision letters) - Invite ICAC to conduct independent study of the
SFCs Dual Filing Team and HKExs Listing
Division/Listing Committee
Transparency/ accountability of Listing functions
174. Enhancing regulation of the accounting
profession
Key elements
- Consider complaints of alleged accounting,
auditing and ethics irregularities committed by
professional accountants involving listed
entities
Independent Investigation Board (IIB)
Financial Reporting Review Panel (FRRP)
- Inquire into apparent departures from the law and
accounting standards in the annual accounts of
companies - Seek remedial action
185. Strengthening regulation of sponsors and IFAs
Key elements
- Specify appointment requirements
- Clarify definition of independence
- Clarify expectation on due diligence
- Emphasis on internal controls assessment by
sponsor
Phase 1 Appointment and role responsibilities
of compliance advisors, sponsors and IFAs
Phase 2 Enhancing SFC regulatory regime
- SFC to conduct an investor survey
- SFC to consult the market on
- Eligibility criteria
- Ways to further enhance its licensing, inspection
and enforcement functions
19HKEx Listing Division is introducing a number of
initiatives to enhance its operations
Key elements
2004 achievements
- Streamline IPO vetting process
- Refine compliance monitoring practices
- Streamline enforcement process
- Implement case database for Listing Division
- Enable e-Submission of IPO forms
- Publish Listing Committee Annual Report
Tentative 2005 initiatives
- Review role structure of Listing Committee
- Introduce a more effective mechanism for
delisting - Facilitate simultaneous listing of A H-shares
- Publish decision letters
On-going initiative continues in 2005
20Conclusions
- Hong Kong operates a disclosure-based regime
- Major reforms are underway in Hong Kong to
further enhance quality of primary market - Enhancing market quality is not solely a matter
of rules and regulations it is partly a matter
of ethics, of culture and of people - However, rules and regulations can influence
corporate behaviour - The regulators can help promote market quality by
strengthening enforcement and raising public
awareness through education and training - Our ultimate goal is to establish a compliance
culture where directors, market participants and
professionals all want to behave well themselves
Current status
Purpose of rules and regulations
Role of regulators
21Thank you
Copy of this presentation is available _at_
www.hkex.com.hk