Since its inception in 2014, the Shanghai-Hong Kong stock connect program (“Stock Connect”) promised to open the doors of the Shanghai Stock Exchange to foreign investors. But the program’s details raised concerns among some market participants: Stock Connect equities are held in an omnibus account in China in the name of the Hong Kong Securities Clearing Corporation (“HKSCC”) for the benefit of the ultimate shareholders. But Chinese law does not have a long tradition of recognizing the concept of beneficial ownership, leading some to question what kind of interest shareholders actually possessed. While the Hong Kong Stock Exchange consistently provided guidance that Chinese regulators and courts should recognize beneficial ownership of Stock Connect equities, many market participants still hoped to hear a similar message from Chinese regulators.
On May 15, 2015, the China Securities Regulatory Commission (“CSRC”) took steps to put beneficial ownership concerns to rest, holding a press conference at which it clarified its position. In general, the CSRC’s responses during the conference reassured overseas investors participating in the Stock Connect. In particular:
- The CSRC confirmed that, under the current Chinese law, the concept of nominee shareholding is recognized under exceptional circumstances including holding securities on the Shanghai Stock Exchange (“SSE Securities”) via Stock Connect. Accordingly, the provisions in Stock Connect’s rules that provide that overseas investors holding SSE Securities through HKSCC are entitled to proprietary interests are consistent with Chinese law.
- Under Stock Connect, the exercise of shareholder rights by overseas investors as beneficial owners is largely governed by the laws and regulations of Hong Kong, including the right to call and participate in shareholders’ meetings, the right to propose matters for voting at shareholders’ meetings, the right to exercise voting rights at shareholders’ meetings, and the right to receive dividends and the distribution of earnings from investment, etc. We note, however, that, while the exercise of these rights may be governed by Hong Kong law, the corporate infrastructure of Chinese companies remains governed by Chinese law.
- The CSRC would also allow Stock Connect investors to bring legal actions in Mainland China in respect of the SSE Securities on the basis that a person who has a direct interest in the relevant case may take legal actions in its own name. Having beneficial interest in the SSE Securities is viewed under the Chinese law as having a direct interest in such securities.
- A shareholder’s beneficial ownership in the SSE Securities will be recognized and respected if such beneficial ownership has been proven in accordance with the laws and regulations under the Hong Kong law.
The full text of the CSRC’s responses can be found on its official website.
As with any new program, some doubts and concerns remain. But the CSRC’s press conference provides the clearest indication yet that Mainland China will recognize beneficial ownership—at least within the confines of the Stock Connect program. This development, coupled with other operational improvements, such as special segregated accounts devised by the Hong Kong Stock Exchange for Stock Connect trading, should encourage more market participants to trade through Stock Connect.