HKEx Modifies Proposed Structures for Listing Matters

Hong Kong Exchanges and Clearing Limited (HKEx) has modified the new structures for listing matters proposed on 6 May. HKEx also plans to streamline the listing process and strengthen the procedures for vetting listing applications.

Under the modified proposal, a new integrated Listing Committee would be introduced to decide on the Listing Division's recommendations on listing applications and delistings. The original proposals on disciplinary matters have not been changed.

The objectives of the original and modified proposals are the same. Both were designed to provide a simpler administrative framework along with the necessary checks and balances.

The modified proposal on the structures for listing matters is enclosed along with the proposals for streamlining the listing process and strengthening the vetting procedures for listing applications.

Introduction

1. On 6 May 2002, Hong Kong Exchanges and Clearing Limited ("HKEx") issued a report (the "May Report ") giving an overview of the proposed structures (the "initial proposed structures") for handling disciplinary-related and non-disciplinary-related listing matters as well as the rationale for the initial proposed structures. The initial proposed structures aimed to create an administratively simpler, effective and efficient framework while providing the necessary checks and balances especially in relation to potential or real conflicts of interest.

2. The initial proposed structures follow the blueprint of the business and regulatory framework envisaged in a document entitled "Hong Kong Exchanges and Clearing Limited: Reinforcing Hong Kong's Position as a Global Financial Centre" issued by the Financial Services Bureau in July 1999, soon after the Financial Secretary announced plans to demutualise and merge the exchanges and clearing houses into HKEx. The contents of the blueprint includes moving the approval function regarding all listing matters internal within HKEx to allow its executives to handle them, and that the current Listing Committee would eventually cease to operate.

3. Since the May Report was published, HKEx has received comments on the initial proposed structures and they fall into two main areas, namely the potential conflicts of interest and the lack of market participation in the listing process. HKEx has considered these concerns carefully and proposes some modifications to the proposed listing structures aimed at addressing these concerns. At the same time, HKEx will introduce improvements to the listing process to streamline the listing process and improve the quality of vetting.

Overview of the Modified Proposed Structures

4. The initial proposed structures regarding non-disciplinary related listing matters would be modified by the introduction of a new Listing Committee to determine the Listing Division's recommendations on new listing applications and cancellation of listing status. The initial proposals regarding disciplinary related listing matters would remain unchanged. The Listing Matters Committee and User Appeal Committee will be renamed the Listing Policy and Appeals Committee (the "LPAC") and the Disciplinary Appeals Committee so as to better reflect their respective functions in the modified proposed structures. An overview of the modified proposed structures regarding non-disciplinary related listing matters and disciplinary related listing matters is set out at Appendices 1 and 2 respectively.

Nomination Committee

5. Similar to the existing structures and as included in the initial proposals in the May Report, independent members to the various committees would be nominated by a Nomination Committee. The Nomination Committee consists of the Chairman, the Chief Executive and one Non-Executive Director of HKEx and the Chairman and two executive directors of the Securities and Futures Commission (the "SFC"). The Nomination Committee is responsible for nominating independent members to the Listing Committee, the LPAC and the Disciplinary Appeals Committee.

Non-disciplinary related listing matters

The Listing Committee

6. Under the modified structures, a Listing Committee (the "new Listing Committee") will be established to determine recommendations of the Listing Division on new listing applications and cancellation of listing status. The Listing Division will be responsible for making first instance decisions on all other non-disciplinary related listing matters.

7. The new Listing Committee will consist of 24 to 30 independent members with broad representation from issuers, financial intermediaries and the investing public nominated by a Nomination Committee, and the Chief Executive of HKEx (and the Head of Listing, Regulation and Risk Management Functional Unit acting as his alternate) will be an ex-officio member. An independent member will chair the new Listing Committee. The quorum of its meeting would be five.

8. Decisions of the new Listing Committee are subject to appeals to the LPAC on specified ground.

The Listing Policy and Appeals Committee

9. The Listing Matters Committee proposed in the May Report will be renamed the LPAC so as to better reflect its function of hearing appeals from decisions of the new Listing Committee and the Listing Division and its advisory role on listing policy matters. The composition of the LPAC will consist of 10 to 13 independent members with representation from issuers, financial intermediaries and the investing public and two Non-Executive Directors of HKEx. A number of the new Listing Committee members will be appointed to the LPAC to ensure that when polices are discussed, there are independent members involved in the listing approval and cancellation process also taking part.

10. As proposed in the May Report, all decisions made by the Listing Division are subject to appeals to the LPAC with no condition required to be satisfied. In order to maintain a balance between fairness and process efficiency, the right to appeal to the LPAC against a decision of the new Listing Committee will be subject to limited grounds. It is considered appropriate that appeals against decisions of the new Listing Committee should be available only where the new Listing Committee's decision is made on the sole ground of unsuitability of listing, in the case of a new listing application or in the case of a cancellation of listing status of a listed company.

Disciplinary related listing matters

11. The initial proposals relating to disciplinary related listing matters contained in the May Report will remain unchanged, except for the renaming of the User Appeal Committee to Disciplinary Appeals Committee so as to better reflect its function as the appeal hearing body for disciplinary decisions of the Adjudication Division. The composition of the Disciplinary Appeals Committee will consist of 10 to 13 independent members with representation from issuers, financial intermediaries and the investing public, and two Non-Executive Directors of HKEx.

Streamlining of Listing Process

12. In addition to the proposed modified governance structures, there are other initiatives that are being, or will be, taken in the next few months by HKEx to improve efficiency and to streamline the listing process and improve the quality of the vetting.

Integrated team structure

13. Listing Division executives are being reorganized into integrated teams under the Corporate Finance Department ("CFD") of the Listing Division. Each CFD team will be responsible for all aspects of the listing process, including accountancy matters, prospectus vetting and authorization for the purpose of Companies Ordinance registration. With this integrated approach, it is expected that the process of vetting listing applications and other transactions can be streamlined and conducted in a more effective and efficient manner.

Enhanced process flow

14. The Listing Rules have detailed provisions regarding application procedures and requirements including documentation submission deadlines. The Listing Division has, so far, been flexible in allowing new applicants and their sponsors additional time in making submissions rather than requiring them to adhere strictly to documentation submission deadlines. During the vetting process, the Listing Division would often raise detailed comments covering both principal matters as well as drafting issues such as consistency of disclosure and presentation of the prospectus. To a certain extent, such an approach might have inadvertently led to the perception and practice among some sponsors that it is the Listing Division and not the listing applicants and their sponsors themselves who should be responsible for ensuring the standard and quality of the prospectuses. This approach has not contributed to the healthy development of the securities market.

15. HKEx is keen to promote the healthy development of the securities market and considers that a clarification of the division of work between the Listing Division and the sponsors should contribute to achieving this. The Listing Division would be able to focus on the efficient and effective administration of the Listing Rules and utilization of its resources and the listing applicants and their sponsors would ensure the standard and the quality of the prospectuses.

16. The Listing Division will in future focus its comments on principal issues only and require the sponsors to adhere strictly to the documentation submission deadline pursuant to the Listing Rules. In order for the Listing Division executives to plan their work in a proper manner and to commence the vetting immediately upon lodgment of a new listing application, the existing Listing Rules require that an advanced proof of the prospectus (not an initial proof) should be submitted with the advance booking form. Thus, if the draft prospectus submitted with the advance booking form is not in a sufficiently completed state, the Listing Division executives will not be in a position to commence a proper vetting. The Listing Division will therefore have to return the application and the initial listing fee to the sponsor and request the listing applicant and its sponsors to re-submit the prospectus. This approach is in line with the requirement of the existing Listing Rules and the expectation that listing applicants and their professional advisors are responsible for ensuring the standard and the quality of prospectuses.

17. The new approach is built on the premise that listing applicants and sponsors and professional advisors are responsible for ensuring compliance with all the relevant legal requirements and Listing Rules stipulations as well as the standard and quality of the prospectuses. A flow chart which shows the key steps of the proposed listing process is set out at Appendix 3.

18. A team of CFD executives headed by a senior executive (the "vetting team") will be assigned to each new listing application received. Under the guidance of the senior executive, the vetting team will aim to issue the first batch of consolidated comments seeking clarification or confirmation of principal issues as soon as practicable upon receipt of a new listing application supported by advanced proof of the prospectus and relevant documentation.

19. It is expected that the new applicant and its sponsors should respond promptly. If responses to the first batch of comments are generally satisfactory, the vetting team will highlight any inadequacies that require follow-up by the sponsors by issuing the pre-hearing batch of comments. The sponsors will have to produce a revised final proof of the prospectus ready for the consideration by the new Listing Committee according to the scheduled timetable. The new applicant and its sponsors should ensure the accuracy and consistency of information in the prospectus. The vetting team will not conduct further review just for the sake of ensuring adequacy and consistency of disclosure.

20. If responses to the first batch of comments are not satisfactory, the vetting team will discuss the issues at a meeting with the directors of the new applicant and its sponsors. The new applicant and its sponsors should submit a further response and a revised prospectus to address the issues. The vetting team will need to be satisfied that all issues of principal matters are adequately addressed before it could issue the pre-hearing batch of comments. If a new applicant and the sponsors failed to address the principal matters at this stage, that particular listing application will not be processed according to the original timetable and there will be a rescheduling of the timetable for processing that listing application.

21. In addition, the Listing Division may not proceed with a listing application, if at any time during the vetting process, the listing applicant and its sponsors fail to address the key issues or a prospectus or the basic structure of the new applicant or the new applicant's business changes too much. The new applicant and its sponsors are required to finalize their work before the Listing Division will re-commence the vetting .

Reasons for the modification to the proposed listing process

22. The proposed approach will streamline the process and reduce the time required for bringing a listing application to the Listing Committee for consideration.

23. The proposed approach is built on the underlying principle that it is the responsibility of the listing applicants and their professional advisers to ensure full disclosure of all material aspects of the listing applicant and its business and the associated risks, the accuracy and consistency of details, including any consequential changes to the draft prospectuses that may be necessary following clarification of matters made in response to the Listing Division's comments. This underlying principle is in line with that of the other major international markets.

24. The proposed process reinforces the requirement for high professional standards from all parties (including the directors of the new applicant and their sponsors) involved in the listing application process. In fact, securities regulators in Hong Kong have taken various initiatives to ensure the quality of sponsors and the quality of prospectus disclosure are at a high standard and are in line with international practices.

25. The SFC has issued a Corporate Finance Advisor Code of Conduct (the "CFA Code"). The CFA Code sets out the expected conduct requirements for advisers engaged in corporate finance advisory work in Hong Kong. It will be used as a benchmark, along with other SFC codes and guidelines, against which a licensed corporate finance adviser's fitness and properness will be measured. Therefore, in assessing its registration status, consideration will be given to how a corporate finance adviser has been discharging its responsibilities as provided for under the CFA Code. In addition, under the existing Listing Rules, there are detailed requirements for GEM sponsors which reflect the standard expected from the sponsors. The Listing Division notes that the requirements of sponsors for the Main Board are less detailed than those for GEM and is working on proposals to establish a more uniform approach regarding sponsors for both the Main Board and GEM. The proposed approach is in line with the regulatory requirements.

26. On 6 May 2002, the SFC published for public consultation draft subsidiary legislation relating to the effective regulation of information disclosure by listed companies and listing applicants. The draft Rules require, among other things, listing applicants to submit their application materials as a statutory filing to the SFC. In line with the international practice in all major jurisdictions, the SFC will be able to comment on the draft disclosure materials (principally the prospectus) and object to the company accessing the public market on the basis of insufficient or inadequate disclosure. The SFC may also investigate and take prosecutorial actions against false or misleading information in prospectuses and other listing documents. This reinforces the underlying principle of the proposed approach.

Timetable

27. Subject to the approval of the relevant Rule amendments and procedures as well as appointment of the members of the new Listing Committee, the LPAC and the Disciplinary Appeals Committee, the modified proposed structures are targeted for implementation later this year.

28. The integrated CFD team structure should be in place by the 3^rdquarter of 2002.

29. The proposed vetting approach will be implemented gradually over the next few months. The implementation of the new listing process requires support from market participants, including new listing applicants and their sponsors and professional advisers. The Listing Division will review the effectiveness and, if necessary, fine tune the process after 12 months of its full implementation.

Appendix I

Note 1 : A Listing Committee will be established for the purposes of determining new listing applications and cancellations of listing status. The Listing Committee will consist of the Chief Executive of HKEx (with the Head of Listing, Regulation and Risk Management Functional Unit acting as his alternate) and 24 to 30 other independent members with broad representation from issuers, financial intermediaries and the investing public. All independent members are to be nominated by a Nomination Committee. Anindependent member will be appointed as the chairman of the Listing Committee. The quorum of the meeting of the Listing Committee is five.

Note 2 : Appeal is as of right (no pre-requisite condition is required to be satisfied) and subject to a review fee. Any party in respect of whom a decision has been made by the Listing Division may request for appeal. A decision by the Listing Division can be reviewed only once by the Listing Policy and Appeals Committee. Appeals are conducted by oral hearing only.

Note 3 : Appeal is subject to proof of specified grounds and to a review fee. Any party who is the subject of a decision of the Listing Committee may request for appeal, provided specified grounds shall be proved. A decision by the Listing Committee can be reviewed only once by the Listing Policy and Appeals Committee. Appeals are conducted by oral hearing only.

Note 4 : Listing Policy and Appeals Committee is a new committee established for the purpose of hearing appeals for decisions of the Listing Division and the Listing Committee. The Listing Policy and Appeals Committee consists of 2 Non-Executive Directors of HKEx and 10 to 13 other independent members with representation from issuers, financial intermediaries and the investing public. All independent members are to be nominated by a Nomination Committee. A limited number of the Listing Committee members will be appointed to the Listing Policy and Appeals Committee to ensure that when policies are discussed, independent members who are involved in the listing approval and cancellation process also take part.

Note 5 : Remittance of the matter may include a direction to make a decision afresh in respect of any specified matter. A decision in respect of a remitted matter is subject to appeal.

Appendix 2

Note 1 : Adjudication Division is a new and independent division which is designated to adjudicate matters referred by the Listing Division. The Adjudication Division may decide not to commence disciplinary proceedings after adjudication of a referral matter which may be dealt with by issuing a letter to the party concerned to state that similar occurrence in the future should be avoided.

Note 2 : Adjudication is by written submissions and correspondence only.

Note 3 : Appeal is as of right (no pre-requisite condition is required to be satisfied) available to any party in respect of which a decision has been made by the Adjudication Division or the Chief Executive of HKEx. A decision by the Adjudication Division or the Chief Executive of HKEx can be reviewed once only by the Disciplinary Appeals Committee. Appeal is subject to payment of a specified fee.

Note 4 : The Disciplinary Appeals Committee is a new committee established for the purpose of hearing appeals for decisions of the Adjudication Division and the Chief Executive of HKEx. The Disciplinary Appeals Committee consists of 2 Non-Executive Directors of HKEx and 10 to 13 other independent members with representation from issuers, financial intermediaries and the investing public. All independent members are to be nominated by a Nomination Committee. Appeals are conducted by oral hearing only.

Note 5 : Remittance of the matter to the Adjudication Division for reconsideration of the decision on liability and/or penalty may include a direction to the Adjudication Division to make a decision afresh in respect of any specified matter. A decision by the Adjudication Division in respect of a remitted matter is subject to appeal.

Appendix 3

Note 1 : New listing applicant also includes its sponsors, legal or professional advisers, as the case may be.

Note 2 : The Listing Division may not proceed with a listing application if at any time during the vetting process the listing applicant and its sponsors fail to address the key issues or a prospectus or the basic structure of the new applicant or the new applicant's business changes too much. The new applicant and its sponsors are required to finalize their work before the Listing Division will re-commence the vetting.