THE STOCK EXCHANGE OF HONG KONG LIMITED
(A wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited)

Amendments to the Listing Rules relating to the Code on Corporate Governance Practices and Rules on the Corporate Governance Report

Background

On 30 January 2004, The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), published an Exposure of Draft Code on Corporate Governance Practices and Corporate Governance Report (Exposure Paper). The main objective of the Exposure Paper was to seek market views on the timing of the proposed implementation of the Code on Corporate Governance Practices (Code) and to allow the market the opportunity to comment on the detailed wording of the Code with a view to removing ambiguities, providing clarity and ensuring that the language adopted in the Code would be clear and concise.

The comment period for the Exposure Paper closed on31 March 2004. The Exchange received comments from a total of 17 respondents. The comments received are available on the HKEx website athttp://www.hkex.com.hk/eng/newsconsul/mktconsul/responses/cgcoderesponses.htm.

The Exchange has published its Conclusions on Exposure of Draft Code on Corporate Governance Practices and Corporate Governance Report (Exposure Conclusions Report) which summarises the main comments raised in response to the Exposure Paper and sets out the final conclusions of the Exchange. The Exposure Conclusions Report is available on the HKEx website athttp://www.hkex.com.hk/eng/newsconsul/mktconsul/documents/expocon.pdf.

Where appropriate, the Exchange has modified the relevant wording of the draft Code and Rules on the Corporate Governance Report set out in the Exposure Paper so as to reflect respondents' views, address their concerns and/or provide clarity.

Amendments

The Exchange has amended the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Main Board Rules) and the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (GEM Rules; together with the Main Board Rules, the Listing Rules) for the purpose of implementing the Code.

In the Main Board Rules, the Code replaces the Code of Best Practice in Appendix 14 and the Rules on the Corporate Governance Report are inserted as a new Appendix 23. In the GEM Rules, the Code is inserted as a new Appendix 15 and replaces existing GEM Rules 5.35 to 5.45. The Rules on the Corporate Governance Report are inserted into the GEM Rules as a new Appendix 16.

Various other consequential amendments to the Listing Rules have been made on the introduction of the Code and Rules on the Corporate Governance Report.

The Listing Rule amendments are set out in the Exposure Conclusions Report.

Requirements of the Code

The Code sets out the Exchange's views on the principles of good corporate governance and two levels of recommendations, namely Code Provisions and Recommended Best Practices. Issuers are expected to comply with, but may choose to deviate from, the Code Provisions. Issuers are encouraged to comply with the Recommended Best Practices which are provided for guidance only. Issuers may devise their own code on corporate governance practices on such terms as they may consider appropriate. Issuers must state whether they have complied with the Code Provisions set out in the Code for the relevant accounting period in their interim/half-year reports and annual reports.

Issuers are required to include a Corporate Governance Report in their annual reports containing prescribed information on their corporate governance practices.

Where the issuer deviates from the Code Provisions set out in the Code, the issuer must give considered reasons, in the case of annual reports, in the Corporate Governance Report and, in the case of interim/half-year reports, either by giving considered reasons for each deviation or, to the extent that it is reasonable and appropriate, by referring to the Corporate Governance Report in the immediately preceding annual report, and providing details of any changes together with considered reasons for any deviation not reported in that annual report.

In the case of the Recommended Best Practices, issuers are encouraged, but are not required, to state whether they have complied with them and give considered reasons for any deviation.

The Code has five sections dealing with directors, remuneration of directors and senior management, accountability and audit, delegation by the Board and communication with shareholders. In each section, the Code sets out the Code Provisions and/or Recommended Best Practices, together with the underlying principles of the relevant provisions to assist listed issuers in developing their own code of board practices.

"For Hong Kong to maintain a competitive status as an international financial centre, companies must practise good corporate governance. The Code represents a significant move towards adoption of international benchmarks of corporate governance, best practice and disclosure", HKEx's Head of Listing, Richard Williams, said.

Implementation and transitional arrangements

The amendments to the Listing Rules will come into effect on 1 January 2005.

The Code, with one exception, will become effective for accounting periods commencing on or after 1 January 2005. The exception is in respect of Code Provision C.2 on internal controls and the proposed disclosure requirements in the Corporate Governance Report relating to listed issuers' internal controls, which will be implemented for accounting periods commencing on or after 1 July 2005.

Thus, for example, a listed issuer with a 31 December year-end will be required to report on compliance with the Code Provisions in its interim/half-year report for the six months ending 30 June 2005.

Likewise, the 1 July 2005 implementation date for Code Provision C.2 on internal controls and the proposed disclosure requirements in the Corporate Governance Report relating to listed issuers' internal controls will also apply to interim/half-year reporting.