Hong Kong Exchanges and Clearing Limited (HKEx) published a consultation paper today (Friday) on proposed changes to the current market practice of ex-entitlement trading. The paper seeks views on whether shares should be traded ex-entitlement only after the entitlement has been approved by shareholders.
"The current practice in Hong Kong has worked well but is different from other leading overseas markets which require that a share not go ex-entitlement until after shareholder approval,” said Mark Dickens, Head of Listing at HKEx. “Trading ex-entitlement only after shareholder approval would remove the risk of uncertainty and thus enhance the operation of our securities market. It would also bring Hong Kong in-line with international and Mainland market practices.”
According to current market practice in Hong Kong, there is no restriction on the timing of the record date for a conditional entitlement in Hong Kong. The company can set the record date before or after the date of shareholder approval. However, the way a company designates its record date for the entitlement will have an impact on the orderly trading of its stocks.
For example, if the record date (and thus the ex-date) of entitlements is set before the date of the shareholders’ meeting, sellers of a security on the ex-date will be subject to a risk of uncertainty as they may not receive the entitlement as expected if the distribution is not approved by shareholders at the meeting. Similarly, if the distribution is blocked at the shareholders’ meeting, buyers on or after the ex-date may receive an unexpected gain.
On the contrary, if the record date (and thus the ex-date) is set after the general meeting at which the entitlement is approved, sellers on the ex-date will not be exposed to any risk of uncertainty and the trading of stocks would be conducted in a fair manner to both buyers and sellers.
The consultation paper, which sets out the proposals, views and concerns of different stakeholders, can be downloaded from the HKEx website. Interested parties are encouraged to respond to the consultation paper by completing and submitting the questionnaire before 28 February 2011.
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