In June 2016, the Securities and Futures Commission (the “SFC”) and the Stock Exchange of Hong Kong Limited (the “HKEx”)[1] issued a joint consultation paper[2] (the “Consultation Paper”) in which they proposed to change the current listing regulatory regime in Hong Kong. Currently, the SFC is not directly involved in the discussion of listing applications or listing policies but has veto power to reject any application or listing policy. In the Consultation Paper, among other measures, the SFC and the HKEx proposed to create two new committees: the Listing Policy Committee (the “LPC”) and the Listing Regulatory Committee (the “LRC”), both of which would include representatives of the SFC. The SFC and the HKEx invited comments on the Consultation Paper to be submitted by November 18, 2016.

Back in time

This matter has a long history. In July 2002, the HKEx released a “Consultation Paper on Proposed Amendments to the Listing Rules Relating to Initial Listing and Continuing Listing Criteria and Cancellation of Listing Procedures”[3] for public consultation. In that consultation paper, the HKEx proposed that prices of listed companies’ shares quoted at below HK$0.5 (so-called “penny stocks”) should be consolidated, failing which, after a series of procedures and possible appeals, delisting may follow. On the next day, 577 (or 76%) out of the 761 stocks listed on the Main Board of the HKEx recorded a loss. The aggregate market capitalization of stocks with a quoted closing price of HK$0.5 or below declined by HK$10.91 billion, representing about 10% of the market capitalization of that sector and about 0.3% of the total market capitalization of the Main Board. Sixty-six stocks (62 of which were penny stocks) suffered a decline of 20% or more. The top loser saw a price plunge of 88%. As a result, the HKEx announced its decision to withdraw the section dealing with the continuing listing eligibility criteria from the consultation paper. The market reaction and concern expressed about this incident led the Financial Secretary of Hong Kong to appoint a Panel of Inquiry to look into the circumstances relating to the preparation and release of that consultation paper.

The Panel of Inquiry issued a report[4] in September 2002 in which it recommended to the Government, among other measures, that a study should be undertaken to review the three-tier regulatory structure relating to listing matters with a view of increasing its effectiveness. The Financial Secretary accepted the Panel’s recommendation and announced in September 2002 the appointment of a three-member Expert Group to review the roles and functions of the Government, the SFC and the HKEx over matters relating to the listing of securities and issuers with listed securities and the operation of the listing regulatory structure.

In March 2003, the Expert Group issued a report[5] in which it recommended transferring of the listing function from the HKEx to the SFC and giving statutory backing to the Listing Rules thereby freeing the HKEx from its conflict of interests (as the HKEx acts as a regulator and a listed profit making company) and leaving it to focus on its commercial services.

As noted in the press[6], the Government first adopted the Expert Group’s recommendations. However, the Government subsequently announced a fresh consultation on the regulation of listing matters which resulted in very little change to-date.

The reforms proposed in the current Consultation Paper may have come after the quality of some new listings in recent years were called into serious question, especially some on the Growth Enterprise Market (the “GEM”), whose shares were the target of speculative trading shortly after listing. David Graham, the HKEx’s chief regulatory officer, said the proposals were aimed at addressing what had been seen as a conflict of interest for the HKEx to have an official sitting on the listing committee to approve new listings. Brian Ho, the SFC’s executive director, refused to respond to suggestions that the proposed reforms were aimed at adding power to the SFC, due to growing dissatisfaction of the HKEx’s listing approval process. He insisted they were aimed at creating a platform which both the HKEx and the SFC “could use to better handle complicated new listings”.[7]

Proposal

Under the current listing regulatory regime in Hong Kong, the HKEx’s in-house Listing Department gives a preliminary approval to a listing and then submits it to the Listing Committee, comprised of 28 members (including accountants, lawyers, listed companies executives and fund managers) who typically have outside professional commitments and are only available on a part-time basis, for the final determination. The SFC is not directly involved in the discussion of listing applications or listing policies but has veto power to reject any application or listing policy.

The following was proposed in the Consultation Paper:

  • It is proposed to create two new committees: the LPC and the LRC, both of which would include representatives of the SFC.
  • The LPC would consist of the SFC’s, the HKEx’s, the Listing Committee’s and the Takeovers Panel’s representatives. The LPC would “initiate, steer and decide listing policy”[8], i.e. propose new Listing Rules (or changes to the Listing Rules) to address problems and make policy-related decisions.
  • The LRC would consist of three SFC’s executives and the Chairperson and two Deputy Chairpersons of the Listing Committee. The LRC would decide on IPO and post-IPO cases that have suitability concerns or broader policy implications (including the type and nature of companies that are suitable for listing and Listing Rule waivers that affect more than one issuer).
  • The existing Listing Committee would decide on all other IPO and post-IPO cases and would provide a non-binding view to both the LPC and the LRC on their decisions.
  • The Listing Department would continue to have primary responsibility for vetting all IPO applications and would be responsible for deciding whether an IPO application is to be referred to the LRC or the Listing Committee. The Listing Committee would have discretion to refer any IPO case presented to it to the LRC for decision.
  • In both, the LPC and LRC, the decisions would be taken by a majority vote and the chairperson would not have a casting vote.
  • The SFC would no longer issue a separate set of comments on the statutory filings of new applicants.
  • Chief Executive of the HKEx would no longer be a member of the Listing Committee, but would become a member of the LPC.
  • The Listing Department would report and be accountable to the LPC; the LRC would replace the current Listing (Review) committee as the review body for the decisions made by the Listing Committee.

It is also proposed to establish two more new committees:

  • Listing Regulatory (Review) Committee, which would comprise members of the board of directors of the SFC and former members of the Listing Committee and replace the existing Listing Appeals Committee as the highest review body within the HKEx; and
  • Listing Disciplinary Chairperson Group, which would consist of at least five senior counsel appointed by the Listing Nominating Committee (which consists of three non-executive members of the HKEx and the Chairman and two Executive Directors of the SFC); each disciplinary case would be heard by either the Listing (Disciplinary) Committee or the Listing (Disciplinary Review) Committee to be chaired by a member of the Listing Disciplinary Chairperson Group.

The SFC announced that the Consultation Paper was designed to achieve the following goals:[9]

  • Achieve, through the LPC, closer coordination and cooperation between the SFC and the HKEx on listing policy formation and provide the SFC with earlier and more direct input on listing policy matters and listing regulation;
  • Streamline, through the LRC, the processes for important or difficult listing decisions that raise suitability issues or have broader policy implications; this would allow the SFC to have earlier and more direct input on these decisions and to collaborate with the HKEx on decision-making;
  • Simplify the process for initial listing applications so that they can be vetted and approved more efficiently (as mentioned above, as part of the proposals, the SFC would no longer as a matter of routine issue a separate set of comments on draft IPO prospectuses under the dual filing regime); and
  • Establish clearer accountability for decision-making in listing regulation and for oversight of the administration of the Listing Rules (to establish a clear reporting structure, it is proposed, as mentioned above, that the LPC would become the body responsible for oversight of the listing function and the Listing Department’s performance in listing regulation).

Other initiatives: third board and dual-class shareholding structures; GEM

It was reported that the HKEx plans to launch a new third board and introduce new products and connect schemes to improve turnover and new listings after it reported a 27% decrease in profit last year.[10] “Consultation on the third board will cover the dual-class shareholding structure, which companies should be [allowed] to list and who should be allowed to trade,” said Charles Li Xiaojia, the HKEx’s chief executive. “There should also be a delisting mechanism to remove poor performers from the board,” he added. Li also said that the third board could be home to different types of companies, be they start-ups with a good potential or well-established companies that wanted to be listed with a dual-class structure. He said the HKEx would involve the SFC and investors in the consultation in an effort to ease their concerns.[11] Market players have mixed views on the issue, with listed companies and investment bankers preferring a dual-share structure while fund managers generally opposing it.[12]

Carlson Tong Ka-shing, the SFC’s chairman, welcomed the HKEx’s efforts to further develop the city as an international equity fundraising center, and supported the “overall objective to open its listing market to a more diverse range of quality issuers”. But he said he could not comment further “until the proposals are more fully developed by the exchange”.[13]

The Government seems to support plans by the HKEx’s to launch a new platform to attract technology and new economy companies to list. “Attracting high quality companies to list in Hong Kong is important to the future development of the Hong Kong capital market,” said Chan Ka Keung, Hong Kong’s Secretary for Financial Services and the Treasury.[14]

David Graham, the HKEx’s chief regulatory officer, has said there would also be another consultation on how to reform the GEM and other listing issues, which should yield additional proposals to address the market quality issue.[15]