The Main Board Listing Rules impose a limit on the number of shares of companies listed on the Stock Exchange of Hong Kong (the Exchange) that may be subject to derivative warrant issues. This limit (the lower of 20 per cent of a company's issued shares or 30 per cent of the public float) is often referred to as a quota.

The extent to which the available quota for a stock has been used is measured by reference to the warrant issues over that stock. With immediate effect, by means of a general modification of Listing Rule 15A.34, the Exchange will measure the extent to which the quota for a stock has been used by reference to the number of warrants over that stock that are held by the public. The current quota limits will remain unchanged and the use of the quota will be measured on a weekly basis.

The Exchange has modified its practice to ensure that it remains relevant in the context of amendments made to the Listing Rules for warrants which came into effect on 10 December 2001 and relevant in the context of current market conditions.

Under the existing Rules, warrant issuers are no longer required to place or sell at least 85 per cent of a derivative warrant issue on launch. Thus the warrant may be listed but held entirely by the issuer. In addition, the issuer may repurchase and resell the warrant throughout its life, resulting in constant fluctuations in the percentage of the issue held by the public.

A review of the daily trading reports submitted to the Exchange by issuers indicates that although the level of the quota use on the basis of warrant issues is high, the level is very low when calculated on the basis of warrants held by the public. The Exchange therefore considers it appropriate to change its practice to facilitate the further development of the derivative warrant market.

The Exchange will continue to monitor the market to ensure the compliance of issuers with the new practice. If 50 per cent of the quota for a stock is used (as calculated above) then issues of derivative warrants over that stock will be prohibited until the utilisation level falls to below 45 per cent.

If the utilisation level increases to 75 per cent monitoring will be on a daily basis. If the utilisation level increases to 90 per cent the Exchange will ask issuers to reduce the utilisation level. To reduce the utilisation level issuers may repurchase derivative warrants issued or suspend the further sale of existing warrants.

The Securities and Futures Commission has granted its consent under Listing Rule 2.04 for the modification of the requirements for derivative warrant issues in the Listing Rules.

A copy of the announcement is attached for reference. (see full attachment)