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Exchange Publishes Results of its Latest Review of Disclosure in Issuers' Annual Reports

Regulatory
29 Jan 2016

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), today (Friday) published a report on the findings and recommendations from its review of issuers' annual reports1 for the financial year ended in December 2014. 

As part of its regular regulatory activities, the Exchange reviews issuers' annual reports to monitor their compliance with its Listing Rules (the Rules), corporate conduct and disclosure of material events and developments, and releases its findings and recommendations to improve transparency and promote a fair, orderly and informed market.

"We are pleased to note that in areas reviewed last year, a vast majority of issuers continue to comply with the Rules, but there are some areas where issuers can improve their disclosure," said David Graham, HKEX's Chief Regulatory Officer and Head of Listing. "Better disclosure improves transparency and communications with shareholders. Issuers should take note of our observations in this report."

The Exchange notes there are areas where some issuers did not fully follow the relevant guidance on best practices and specifically draws issuers' attention to the following areas where they should improve their practices:

1.

Continuing connected transactions –  independent directors have an important role in monitoring issuers' continuing connected transactions, and are required under the Rules to review these transactions annually. However, based on the documents provided by issuers' management to independent directors for review, it is unclear how the independent directors assessed and concluded that the transactions were conducted according to the terms of the framework agreements between the issuers and their connected persons. With the new Code Provision C.2.5of Appendix 14 to the MB Rules / Appendix 15 to the GEM Rules requiring internal audit review of risk management and internal control systems, issuers should ensure that their internal audits review continuing connected transactions and the relevant internal control procedures, and provide the findings to independent directors to assist them in performing their annual review.

2.

Contractual arrangements adopted by issuers –  Guidance Letter (GL77-14) recommends that issuers keep their shareholders informed of their material business operations through these arrangements.  A vast majority of issuers adopting contractual arrangements did not disclose details of their business activities or a summary of the major terms under the relevant structured contracts and their significance to the issuers.  Given the potential risks associated with these arrangements, issuers should take note of and consider the guidance in preparing their future annual reports.

3.

Disclosure of significant changes to issuers' financial performance and reliance on key customers in the MD&A section –  there is general improvement in the MD&A disclosures in the areas reviewed.  Many issuers have provided more discussions relating to significant changes in their revenue, profit margin and tax positions.  However, issuers should provide more in-depth discussion about their compliance with the relevant laws and regulations, their capital requirements and the financing plan for such capital requirements, and their key relationships with customers.  Issuers should note that some of these items were previously recommended commentaries and are now disclosure requirements for business reviews under the Rules, which apply to annual reports of financial periods ended on or after 31 December 2015.  Issuers may also refer to the guidance materials issued by the Hong Kong Institute of Certified Public Accountants and the Hong Kong Institute of Directors on the preparation of a business review.

4.

Equity fundraising – to provide accountability to shareholders, issuers conducting equity fundraising should provide meaningful updates in their annual reports on the actual use of proceeds from equity fundraisings, including details of the application and a breakdown of how the funds were allocated among different uses.

In the next review2, the Exchange intends to cover most of the areas reviewed in the report it published today, in particular continuing connected transactions will continue to be an area of focus.

Issuers should note the observations and recommendations discussed in the report and follow the relevant guidance.  The report is available under the "Rules & Regulations – Rules and Guidance on Listing Matters – Other Guidance Materials for Listed Issuers – Listed issuers' general disclosure obligation" section of the HKEX's website. 


Note:

1 Excluding annual reports issued by collective investment schemes listed under Chapter 20 of the Listing Rules for the Main Board.
2 The next review will cover annual reports for the financial year ended between January and December 2015.

Ends

Updated 29 Jan 2016