Understanding the Risks of Investing in Overseas Issuers 
27/09/2013 
 
This education document is intended as a general guide to highlight some basic facts and characteristics of investing in securities of overseas companies.  HKEx and/or its subsidiaries endeavor to ensure the accuracy and reliability of the information provided, but do not guarantee its accuracy and accept no liability (whether in tort or contract or otherwise) for any loss or damage arising from any inaccuracies or omissions.  If investors require further information for investing in overseas companies, they should refer to the company’s listing documents and corporate communications on the HKExnews website (http://www.hkexnews.hk), read the company’s Company Information Sheet (if published) and consult their brokers or other professional advisors prior to making any decision.

Mission

 
The mission of The Stock Exchange of Hong Kong Limited (the Exchange) is to provide a fair, orderly and efficient market for trading of securities.  As we continue to attract new international listings, we remain committed to ensure that risks are managed prudently to maintain the balance between attracting new international listings and ensuring sufficient investor protection.
 

Local and Overseas Companies

 
Our listing regime is open to both local and overseas companies.  The Listing Rules administered by the Exchange apply to overseas companies as they do to Hong Kong companies, subject to the additional or modified requirements in Chapters 19 and 19A of Main Board Rules or Chapters 24 and 25 of the GEM Rules.  With the Securities and Futures Commission, we published an updated joint policy statement on 27 September 2013 to assist overseas companies that apply for listing on the Exchange.
 

Primary and Secondary Listings

 
Overseas companies may choose to apply for a primary listing on the Exchange.  Primary listed companies normally trade all or the majority of their listed equity securities on the Exchange and so need to fully comply with the Listing Rules, unless specifically waived.
 
Secondary listed companies are primarily listed on another stock exchange and the majority of their equity securities are usually traded outside Hong Kong.  As they already comply with the rules of their primary exchange we grant them extensive waivers from our Listing Rules. To be suitable for these waivers, we require a company seeking secondary listing to normally have a large market capitalisation and a long track record of regulatory compliance on its primary market. It must be primary listed on a stock exchange recognised by us as having a strong reputation for requiring high shareholder protection and corporate governance standards. Also, a secondary listing applicant must have a “centre of gravity” outside Greater China (see Section 5 of the joint policy statement). The Hong Kong stock market is the natural market for listings of Mainland and Hong Kong companies and the “centre of gravity” test reflects this.
 
An overseas company can, alternatively, opt for a dual-primary listing where it is subject to both full requirements here and those of another market.

 

The appendix to the joint policy statement explains how the Listing Rules apply to an overseas company that is primary listed, dual primary listed or secondary listed on the Exchange’s Main Board.  This includes guidance on the “common waivers” we are prepared to grant an overseas company seeking a listing.  We consider applications for each waiver on its own facts and circumstances and the overseas company seeking a waiver must demonstrate why the waiver is appropriate.

In addition, for secondary listed companies, the appendix to the joint policy statement shows the Listing Rules that we automatically waive if the company meets the criteria set out in Section 5 of the joint policy statement.  No application to us is required for these “automatic waivers” but secondary listed companies must disclose the details of these waivers in their listing documents and Company Information Sheet.

 

Risks Relating to Investing in Overseas Companies

 
We must be satisfied that a company’s home jurisdiction provides sufficient regulatory oversight, disclosure and transparency for the protection of investors before we approve its listing.  The risks of investing in an overseas company are different from that of a Hong Kong company.
 
  • An overseas company is subject to a different set of corporate laws governing its affairs including duration, organisation structure, governing bodies and their powers, shares transfer, shareholders rights, shareholders’ dispute resolutions.
  • It may be difficult for shareholders of an overseas company to enforce their shareholder rights against the company or its directors due to complications arising from cross-border access to evidence, legal services, court assistance or the incremental costs related to those services.
  • Hong Kong regulators may not have extra-territorial investigation and enforcement jurisdiction.  Instead, reliance has to be placed on the overseas regulatory regimes to enforce against any corporate governance breaches committed by their subject.
  • If an overseas company’s principal operations and assets are outside its place of incorporation or Hong Kong, they may be subject to other laws, standards, restrictions and risks that significantly differ from those in Hong Kong.
 
As overseas companies seek to list in our market, we will see more that are structured and operated in a way that is not common to Hong Kong. Different securities regulators and stock exchanges adopt different regulatory mechanisms in their governance of public companies to achieve investor protection.  There is no single correct regulatory approach to shareholder protection.  Recognising this, we may grant or refuse waivers or impose waiver conditions to ensure satisfactory regulatory outcomes.
 

Additional Risks Relating to Investing in Secondary Listed Companies

 
Secondary listed companies are primarily regulated by another stock exchange and statutory securities regulator and are often granted extensive Listing Rule waivers.  They do not conform to the Listing Rules in their entirety.  Because of the different characteristics of overseas and Hong Kong securities markets, fluctuations in the price of securities are more likely.
 

Additional Risks Relating to Investing in HDR Companies

 
The depositary receipt (HDR) framework is an alternative facility for overseas companies to list on the Exchange that helps them overcomes certain legal and practical problems (see paragraphs 76 to 78 of the joint policy statement). A company seeking to list in Hong Kong through HDRs will have to comply with generally the same requirements as an issuer of shares, except for the modifications in Chapter 19B of the Main Board Listing Rules.  However, HDRs are not shares and therefore do not attract the same legal consequences as those of shares.  The HDR Depositary’s obligations are set out in a deposit agreement that is published in the company’s listing document and as part of its Company Information Sheet.
 
HDR holders do not have rights of shareholders and must rely on the HDR Depositary to exercise on their behalf the rights of a shareholder. For example, HDR holders may only vote by providing instructions to the HDR Depositary.
 
HDR holders need to pay for the fees and expenses charged by the HDR Depositary for services rendered.
 
Investors are advised to carefully study the HDR issuer’s listing document and the deposit agreement and to understand the rights and obligations of an HDR holder.
 
Click here for further information on HDRs.
 

Tax Risk

 
A Hong Kong person may incur foreign tax reporting and payment obligations through holding the shares of an overseas company. If withholding tax on distributable entitlements or any other tax is payable (e.g. a Financial Transaction Tax (see FAQs, capital gains tax, inheritance or gift taxes), the overseas company must disclose in its listing document details of the tax payable and whether Hong Kong investors have any tax reporting obligations.  It must also disclose this information, on an on-going basis after listing, in its Company Information Sheet.

Bearer Share Risk

Certain overseas companies’ home jurisdictions may allow the issue of bearer share certificates.  Under such regimes, ownership of shares in a company may be transferred by the physical transfer of share certificates without the transferor and transferee having signed any document evidencing such transfer.  Shareholders holding bearer share certificates instead of holding shares through CCASS will be subject to the risks of losing the legal ownership of the shares in case of loss or destruction of the physical share certificates.  Investors are advised to carefully study the relevant company’s listing document and to understand the risks of holding bearer share certificates and their rights under the relevant law of the company’s home jurisdiction.
 

Enhanced Disclosure on Overseas Companies

 
We strive to enhance transparency to help investors appreciate the risks of investing in overseas companies.  To achieve this goal:
 
  • We require overseas companies to prominently disclose the risks associated with their jurisdiction of incorporation, operations located in foreign lands and other foreign affiliations, in their listing document, corporate communications and Company Information Sheet.
 
  • We have designed our website to help investors identify and understand overseas companies.  We have also given certain overseas companies special stock short name indicators and stock code ranges.
 

Company Type

Stock Short Name

 

Stock Code Allocation Plan

 

Secondary listed companies

Add the letter “S” at the end of the stock short name

-

HDR issuers Add the letters “DR” at the end of the stock short name Range between 06200-06499
HDR issuers incorporated in the United States of America whose depositary receipts listed on the Exchange are restricted securities under United States federal securities laws Add the letters “RS” at the end of the stock short name Range between 06300-06399
 

Company Information Sheets

 
An overseas company must publish a Company Information Sheet on the HKEx website containing:
(a)     a summary of the waivers and exemptions that it has been granted;
(b) a summary of the provisions in the laws and regulations in its home jurisdiction and primary market that are different to those required by Hong Kong law regarding:
(i)    the rights of its holders of its securities and how they can exercise their rights;
(ii) directors’ powers and investor protection; and
(iii) the circumstances under which its minority shareholders may be bought out or may be required to be bought out after a successful takeover or share repurchase;
(c) details of withholding tax on distributable entitlements or any other tax that is payable (e.g. capital gains tax, inheritance or gift taxes) and whether Hong Kong investors have any tax reporting obligations; and
(d) where a company is listing HDRs, a summary of the terms and conditions in the depositary agreement and deed poll.
 
Whenever there is any material change to the information disclosed in its Company Information Sheet, an overseas company must update and revise its Company Information Sheet to reflect the changes.
 
Click here for a list of the Company Information Sheets published by overseas companies.
 

Warning to Investors

 
Investors are advised to carefully study the company’s listing document and Company Information Sheet (if published) to understand the risks associated with investing in an overseas company.
 
A company’s listing document and Company Information Sheet (if published) contains a summary of the laws and regulations to which it is subject.  Investors should read it carefully before they make investment decisions.  In case of doubt, investors should consult their professional advisers.