The Exchange released a consultation paper in May 2000 in relation to Chapter 17, Share Schemes, and the consultation period closed in June 2000. We have taken into account the responses to the consultation in the proposed rule changes. We are aware of the need of listed issuers to use options to attract talented employees. We also acknowledge that there is a need to strike a balance on shareholders right to make decisions and to promote transparency through disclosure. We are therefore of the view that the amendments are beneficial to the continuing development of the Main Board and would strike a balance between ensuring market competitiveness and maintaining the quality of the market.

The amendments will allow greater flexibility in operation of schemes through the relaxation of a number of requirements, and at the same time, restrictions will be put in place in other areas to safeguard against abuse of the scheme and to protect minority shareholders.

We set out below the principles of the amendments to Chapter 17, Share Schemes.

Participants of the scheme

The existing rules state that the provisions of Chapter 17 apply to all schemes involving the issue or grant of options over shares or other securities by listed issuers to, or for the benefit of, executives and/or employees. The new rules will not include any restriction on the eligibility of participants of share option schemes, hence a relaxation from the current rules. The listed issuer will be required to define the participants in the terms of the schemes and to disclose the basis of determining the eligibility of participants.

Overall limits on options

Under the existing rules, the total amount of the securities subject to the scheme must be stated and must, when aggregated with any securities subject to any other schemes, be limited to 10% of the relevant class of securities in issue from time to time. Under the new rules, listed issuers can issue options so that securities to be issued upon exercise of all outstanding options does not exceed 30% of the relevant class of securities in issue from time to time.

In addition, listed issuers can issue options so that the total number of securities that may be issued upon exercise of all options to be granted under all the schemes does not in aggregate exceed 10% of the relevant class of securities in issue. The listed issuer may renew this limit at any time, subject to shareholders approval and the issue of a circular. The listed issuer may also seek separate shareholders approval for granting options beyond the 10% limit to participants specifically identified by the listed issuer, subject to shareholders approval and the issue of a circular.

The new rules will provide flexibility to listed issuers to "refresh" the limit subject to shareholders approval, while at the same time, securities that may be issued upon exercise of all outstanding options should not exceed 30% of the relevant class of securities in issue from time to time.

Maximum entitlement of each participant

Under the existing rules, the maximum entitlement for any one participant must not exceed 25% of the aggregate of all securities subject to the scheme (i.e. a maximum of 2.5% of securities in issue). Under the new rules, the maximum entitlement is that the total number of securities issued and to be issued upon exercise of options granted and to be granted in any 12-month period up to the date of the latest grant does not exceed 1% of the relevant class of securities in issue. The listed issuer can grant further options in excess of this limit, subject to shareholders approval, with that participant and his associates abstaining from voting, and the issue of a circular.

The new rules will provide greater flexibility for listed issuers to grant options to an individual participant as the new limit is effectively higher than that in the existing rules.

Exercise price

Under the existing rules, the exercise price must not be less than 80% of the average closing price of the securities as stated in the Exchanges daily quotations sheets for the five business days immediately preceding the date of grant. The new rules will require that the exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Exchanges daily quotations sheet on the date of grant, which must be a business day; and (ii) the average closing price of the securities as stated in the Exchanges daily quotations sheets for the five business days immediately preceding the date of grant.

The new rule is a tightening up on the existing rules.

Granting options to connected persons

Under the new rules, independent non-executive directors of a listed issuer (excluding any independent non-executive director who is the grantee of the options) will be required to approve each grant of options to a director, chief executive, or substantial shareholder of the listed issuer or any of their associates.

If a grant of options to a substantial shareholder or an independent non-executive director or their respective associates will result in the total number of securities issued and to be issued upon exercise of options granted and to be granted (including options exercised, cancelled and outstanding) to such person in the 12-month period up to and including the date of such grant:

(a) representing in aggregate over 0.1% of the relevant class of securities in issue; and

(b) (where the securities are listed on the Exchange) having an aggregate value, based on the closing price of the securities at the date of each grant, in excess of HK$5 million,

such further grant of options will be required to be approved (voting by way of poll) by shareholders of the listed issuer. The listed issuer must send a circular to the shareholders. All connected persons of the listed issuer will be required to abstain from voting at such general meeting, except that any connected person may vote against the relevant resolution at the general meeting provided that his intention to do so has been stated in the circular.

The new rules are intended to avoid abuse of share option schemes by connected persons.

Disclosure in annual reports and interim reports

The new rules will require listed issuers to disclose details of the option programmes and parameters in the annual and interim reports, including the number of options, date of grant, exercise price, exercise period and vesting period. In addition, in order to encourage good corporate governance, the new rules encourage listed issuers to include a valuation of options granted during the financial year/period in the annual/interim reports using an option pricing model. This requirement is not mandatory. If a listed issuer chooses not to include a valuation of options in its annual or interim report, it must explain why such valuation is inappropriate.

The new rules are intended to ensure transparency on the operation of share option schemes by way of disclosure and that useful information is provided to shareholders and investors to assess the potential dilution effect and the benefit provided on the granting of options.

Transitional arrangements

Options already granted before the effective date would not be affected by the new rules. Listed issuers can continue to grant options under their existing schemes up to the effective date of the new rules. From the effective date, it is possible for listed issuers to grant further options from their existing schemes only if the options granted are in accordance with the requirements of the new rules of Chapter 17. Otherwise, listed issuers may have to alter the terms of their existing schemes, or to adopt a new scheme before further options may be granted.

The Exchange may allow a listed issuer to grant options under the terms of its existing share option schemes on or after the effective date if the listed issuer is able to demonstrate to the satisfaction of the Exchange that such options are granted to a participant pursuant to a contractual commitment given by the listed issuer to such participant before the effective date.

The rule changes will come into effect on 1 September 2001. Reprinted pages of the Listing Rules will be distributed in due course. The new requirements of Chapter 17 are available for viewing on the website of Hong Kong Exchanges and Clearing Limited at http://www.hkex.com.hk.