Frequently Asked Questions 
15/07/2011 
 

Chapter 2 Regulation of the Hong Kong Market

2.1

In what way is the regulatory role of HKEX different from that of the Securities and Futures Commission?  

The Securities and Futures Commission (SFC) is an independent statutory body responsible for regulating the market, safeguarding market integrity, and enforcing securities and futures market legislation. Parties regulated by the SFC include HKEX and its subsidiaries (including the stock and futures exchanges and associated clearing houses), financial market intermediaries (namely securities dealers which include Exchange Participants; sponsors; share registrars; fund managers; and investment advisers) and investors.

The SFC’s statutory regulatory objectives are:

    • to maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry;
    • to promote understanding by the public of the operation and functioning of the securities and futures industry;
    • to provide protection for members of the public investing in or holding financial products;
    • to minimise crime and misconduct in the securities and futures industry;
    • to reduce systemic risks in the securities and futures industry; and
    • to assist the Financial Secretary in maintaining the financial stability of Hong Kong by taking appropriate steps in relation to the securities and futures industry.

Regulation of takeovers, share repurchases and privatisations, which may involve investor conduct, is also the responsibility of the SFC.

Hong Kong Exchanges and Clearing Limited (HKEX) is the operator of Hong Kong’s central securities and derivatives marketplace and the front-line regulator of listed issuers (including listed companies). In this role, HKEX regulates listed issuers; administers listing, trading and clearing rules; and provides services at the wholesale level to customers of the exchanges and clearing houses, including issuers and intermediaries (namely investment banks or sponsors, securities and derivatives brokers, custodian banks and information vendors) who service investors directly. Services provided by the exchanges and clearing houses include trading, clearing and settlement, depository and nominee services, and information services.

For more SFC and HKEX regulatory information, please visit the SFC website at www.sfc.hk and the “Rules & Regulations” section of the HKEX website. 

 

2.2

How does HKEX enforce the Listing Rules? 

HKEX is the operator of the central securities and derivatives marketplace and the front-line regulator of listed issuers. HKEX carries out regulation of listed issuers in accordance with the Listing Rules. A listed company shall comply (and undertakes pursuant to its application for listing to comply) with the Listing Rules. Each director of a listed company is required to sign the Director’s Undertaking and undertake to use his/her best endeavours to abide by the Listing Rules and to procure the listed company’s compliance with the Listing Rules.

HKEX’s regulatory functions in respect of listing are carried out by the Listing Division and the Listing Committee, which comprises largely independent members. Listing responsibilities are mainly of two types: (1) the formulation and administration of Listing Rules, which set out listing requirements for listing applicants and listed companies; and (2) the impartial enforcement of the Listing Rules. The Listing Rules adopts a disclosure-based regulatory approach for both initial public offerings, or IPOs, and listed securities, under which directors of a listed company are held responsible for the accuracy and completeness of all disclosure.

The Listing Division is the major contact for listing applicants and their advisers (namely sponsors and independent financial advisers). Information submitted by applicants to meet prospectus requirements in the Listing Rules and the Companies Ordinance is vetted by the Listing Division, which works with the Listing Committee to approve applications. HKEX is required under the dual filing regime to file applicant information with the SFC. The SFC has the right to reject an application.

HKEX is committed to closely monitoring Listing Rules compliance by listed companies and their directors. Measures include the monitoring of share price movements and media reports, and the vetting of important announcements and documents. Disciplinary actions will be considered against any listed company that violates the Listing Rules and/or its director(s). A listed company’s inaccurate or misleading disclosure that may give rise to a false market may constitute a criminal or civil offence. HKEX will refer these cases to law-enforcement agencies.

The SFC, as a statutory regulator, reviews the eligibility of sponsors and compliance advisers, continuously monitors their conduct and takes disciplinary actions against them if necessary. Under the Listing Rules, HKEX will only permit a firm which is a holder of the necessary SFC licences or appropriately registered by the SFC to work as a sponsor or compliance adviser. A sponsor must meet HKEX’s due diligence expectations when making a listing application for a company.

The Listing Rules and their latest updates are posted in the “Rules & Regulations” section of the HKEX website. 

 

2.3

What are the basic requirements for listing on the Stock Exchange?  

The Main Board and GEM have different listing requirements.

The prerequisites for listing equity securities on the Main Board are: -

1

Both the issuer and its business must, in the opinion of the Stock Exchange, be suitable for listing. An issuer (other than an investment company) whose assets consist wholly or substantially of cash or short-term securities will not normally be deemed suitable for listing, except where the issuer is solely or mainly engaged in the securities brokerage business.

 

2

A new applicant must satisfy either one of the following tests:

 

i.

The profit test

A new applicant must have a trading record of not less than three financial years under substantially the same management. There must be ownership continuity and control for the most recent audited financial year. Profit attributable to shareholders must, in respect of the most recent year, be not less than $20 million and, in respect of the two preceding years, be in aggregate not less than $30 million; or

 

 

ii.

The market cap / revenue / cash flow test

A new applicant must have a trading record of not less than three financial years under substantially the same management. There must be ownership continuity and control for the most recent audited financial year. The applicant must have a market capitalisation of at least $2 billion at the time of listing; revenue of at least $500 million for the most recent audited financial year; and a positive cash flow from operating activities that are to be listed of at least $100 million in aggregate for the last three financial years; or

 

 

iii.

The market cap / revenue test

A new applicant must have a trading record of not less than three financial years under substantially the same management. There must be ownership continuity and control for the most recent audited financial year (unless otherwise waived by the Stock Exchange in accordance with relevant provisions*). The applicant must have a market capitalisation of at least $4 billion at the time of listing; revenue of at least $500 million for the most recent audited financial year.

 

 

 

*Note :

The new applicant has to demonstrate that its directors and management have at least three years of satisfactory experience in the line of business and industry of the listing applicant; and that it is under substantially the same management for the most recent audited financial year.

 

3.

The expected market capitalisation of a new applicant at the time of listing must not be less than $200 million and the expected market capitalisation of its securities held by the public at the time of listing must not be less than $50 million.

 

4.

To ensure an open market in the securities for which listing is sought: -

 

i.

at least 25 per cent of an issuer's total issued share capital must at all times be held by the public. The Stock Exchange may, at its discretion, accept a lower percentage of between 15 per cent and 25 per cent in the case of issuers with an expected market capitalisation of over $10 billion at the time of listing, on condition that the issuers will make appropriate disclosure of the lower prescribed percentage of public float in the initial listing document and confirm sufficiency of public float in successive annual reports after listing;

 

 

ii.

in the case of a class of securities new to listing, there must be a minimum of 300 shareholders at the time of listing;

 

 

iii.

the top three public shareholders cannot hold in aggregate more than 50 per cent of the public float at the time of listing.

 

5.

A new applicant must have available sufficient working capital for at least the next 12 months from the date of publication of the listing document.

 

6.

The applicant must make all necessary arrangements so that its securities for which listing is sought are accepted as eligible by Hong Kong Securities Clearing Company Limited (HKSCC) for deposit, clearance and settlement in Central Clearing and Settlement System (CCASS).

 

7.

The new applicant must appoint a sponsor who is required to be independent from the date of the filing of the A1 Form to the date of listing.

 

This is only a summary of some of the basic conditions to be met by applicants seeking a listing on the Stock Exchange. Special or additional conditions apply to infrastructure project companies, mineral companies, overseas issuers and Mainland issuers seeking a listing. For details, please refer to Listing Rules (Main Board) at "Rules and Guidelines on Listing Matters" under “Rules & Regulations” on the HKEX website.

The basic listing requirements of GEM are as follows:

1.

The new applicant must have a positive cash flow from adjusted operating profits (before changes in working capital and taxes paid) of not less than $20 million in aggregate for the two financial years preceding the issue of the listing document.

 

2.

Market capitalisation of at least $100 million.

 

3.

Minimum public float of 25% (like the Main Board, subject to adjustment to between 15% and 25% in the case of issuers with a market capitalisation of more than $10 billion). Market capitalisation of at least $30 million must be held by the public.

 

4.

Minimum shareholder spread of 100 public shareholders and not more than 50 per cent owned by the three largest public shareholders.

 

5.

Management continuity for the most recent two financial years.

 

6.

Ownership continuity and control for the most recent financial year.

 

7.

A new applicant must set out clearly its overall business objectives for the remainder of the financial year in which listing takes place and the two subsequent financial years, and elaborate on how the objectives will be achieved.

 

8.

The new applicant must appoint a sponsor who is required to be independent from the date of the filing of an application for listing on Form 5A (for GEM applicants) to the date of listing.

 

The Listing Rules are subject to amendment from time to time. Detailed listing requirements of the Main Board and GEM are posted at "Rules and Guidelines on Listing Matters" under “Rules & Regulations” at the HKEX website.

 

2.4

How does Main Board differ from GEM in terms of basic listing requirements

Main Board and GEM listing requirements mainly differ in the following areas:

1.

Profit record

Main Board companies must have a track record of at least three years (with exceptions in certain circumstances). Under the "profit test", a new applicant must have a profit of $20 million in the most recent financial year and an aggregate profit of $30 million in the two preceding financial years. Under "the market capitalisation / revenue test" or the "market capitalisation / revenue / cash flow test", a new applicant must comply with alternative financial standards tests (including the revenue requirement, such as a new applicant must be able to generate substantial revenues for the most recent audited financial year).  In the case of GEM, a new applicant must have a positive cash flow from adjusted operating profits (before changes in working capital and taxes paid) of not less than $20 million in aggregate for the two financial years preceding the issue of the listing document.

 

2.

Market capitalisation

Main Board companies must have a market capitalisation of at least $200 million at the time of listing. Under "the market cap / revenue test" or the "market cap / revenue / cash flow test", an applicant must have a market capitalisation of at least $4 billion or $2 billion respectively. A GEM company must have a market capitalisation of at least $100 million at the time of listing.

 

3.

Management change

The Main Board requires the business of a listed company to be under substantially the same management throughout its three-year track record period (with some exceptions). GEM applicants are required to be under substantially the same management during the two full financial years prior to the issue of the listing document and up to the date of listing.

 

4.

Appointment of directors

Both Main Board and GEM companies are required to appoint at least three independent non-executive directors, one of which at least must have appropriate professional qualifications or accounting or related financial management expertise. Unlike a Main Board company, a GEM company must appoint an executive director as compliance officer.

 

5.

Minimum public float

A listed company must have at least a minimum public float of 25 per cent of the issued share capital. This can be lowered to not less than 15 per cent at the discretion of the Stock Exchange if the issuer's market capitalisation exceeds $10 billion. Main Board and GEM companies must have a public float of not less than $50 million and $30 million respectively.

 

6.

Disclosure of financial information

A Main Board company must issue its annual results announcement not later than three months and its annual report not more than four months after the end of the financial year.  The company shall also issue its interim results announcement not later than two months and its interim report not later than three months after the interim period ends. A GEM company must issue its annual results announcement and its annual report not later than three months after the date upon which the financial period ended.  The company shall also issue its quarterly report, half-year report and results announcement for the periods not later than 45 days after the end of such period.

 

7.

Appointment of compliance adviser

Main Board companies must appoint a compliance adviser for the period commencing on its listing date and ending on publication of financial results for the first full financial year after listing. GEM companies must retain its compliance adviser until the publication of financial results for the second full financial year after listing.

 

8.

Fundamental change in the nature of business

Within the first 12 months after listing, an issuer may not effect any acquisition or disposal which would result in a fundamental change in its principal business activities as described in the prospectus (waivers may be granted in exceptional circumstances). Other than with the prior approval of independent shareholders, a GEM company may not, during the remainder of the financial year in which listing occurs and in the subsequent 12-month period, effect any fundamental change in its principal business activities.

 

For more details about the comparison of the salient features of the Main Board and GEM Listing Rules, please refer to "Listing Requirements and Procedures" at "Listing Matters" on the HKEX website.  

2.5

How does regulation differ between companies incorporated in Hong Kong and those which are not? 

All companies seeking a primary listing in Hong Kong, regardless of their place of incorporation, are subject to the Listing Rules, the SFC’s Codes on Takeovers and Mergers and Share Repurchases and other applicable regulations. The Listing Rules apply as much to overseas companies listed in Hong Kong as they do to companies incorporated and listed in Hong Kong. The overseas companies may also be subject to additional requirements, modifications or exceptions set out in the Listing Rules.  

 

2.6

Which organisation is responsible for the regulation of takeovers, mergers, privatisations and share repurchase activities?

The Codes on Takeovers and Mergers and Share Repurchases govern takeovers, mergers, privatisations and share repurchases. The SFC is responsible for administering these two Codes. For details of regulation of takeovers and share repurchase, please visit its website on www.sfc.hk.

 

2.7

Can HKEX stop the management of listed companies from proposing or conducting transactions considered "unfavourable" to minority shareholders?

Terms of a listed company's transactions are commercial decisions for its board and shareholders. As the frontline regulator of listed companies, HKEX cannot know more about a company's business development and capital needs than its directors, management and shareholders. If HKEX interferes with the commercial decisions of listed companies, the companies may miss opportunities for investment and business development. Therefore, HKEX cannot and should not intervene in commercial decisions made by directors and shareholders of a listed company. However, listed companies must adhere to the general principles of the Listing Rules such that all holders of listed securities are treated fairly and equally and that directors of a listed company act in the interests of its shareholder as a whole, particularly where the public represents only a minority of the shareholders. Directors of listed companies also have an obligation and fiduciary duty to ensure transactions are fair and reasonable, and are in the interest of the listed company and its shareholders. The Listing Rules include provisions to ensure that shareholders have the appropriate opportunity to vote on major decisions made by the management of listed companies.  The Listing Rules also include provisions requiring shareholders who may have a potential conflict of interest in a transaction to abstain from voting at general meetings where shareholders are asked to approve the transaction.

 

2.8

What should an investor do if he/she has queries about the conduct of brokers or other intermediaries? 

Investors who have opened a securities account at a brokerage house should seek assistance from the SFC if they have queries on brokers' conduct.  The telephone number of the SFC is (852) 2840 9222 and its email address is: enquiry@sfc.hk. Investors who trade through banks should contact the Hong Kong Monetary Authority (HKMA). The telephone number of HKMA is (852) 2878 8196 and its email address is hkma@hkma.gov.hk.

 

2.9

What protection is there for an investor who suffers monetary losses as a result of "default" by an intermediary such as a broker

Investors can claim compensation from the Investor Compensation Fund.  The fund is administered by the Investor Compensation Company, a wholly-owned subsidiary of the Securities and Futures Commission.  The fund will pay compensation to investors of any nationality who suffer pecuniary losses as a result of default of a licensed intermediary or authorised financial institution in relation exchange-traded products in Hong Kong. The compensation is applied on a per-investor basis. There is a compensation limit of $150,000 for trading of securities and $150,000 for trading of futures contracts. For details, please visit the website of the Investor Compensation Company at: www.hkicc.org.hk.