In 2016, The Stock Exchange of Hong Kong Limited (the Exchange) continued to rank number one globally in terms of IPO fundraising, with 126 new companies listing and raising approximately HK$195.3 billion in total. In an effort to uphold the quality and reputation of Hong Kong’s stock market, the Exchange published its 2016 Listing Committee Report (the Report) on 20 March 2017, which included a review of the Exchange’s work in 2016 and an overview of its policy agenda for 2017 and beyond. The Report highlighted the main issues that the Exchange considered to be of greatest interest to the investing public and listed companies and outlined the Exchange’s position or proposed action in relation thereto.
According to the Report, the Exchange is focused on three areas in particular. These are: (a) suitability for listing; (b) backdoor listing; and (c) capital raising by listed issuers. Other substantial matters considered by the Exchange include, among others, the review of listing on the Growth Enterprise Market Board (GEM), pre-IPO investments and the expansion of the thematic approach to enforcement.
Suitability for listing
The Exchange previously conducted a review of all new listings on the Main Board and GEM between 2012 and 2015 to identify the characteristics of companies that were perceived to raise concerns regarding their suitability for listing. As a result of the findings, the Exchange issued a guidance letter on characteristics that would be of concern regarding a company’s suitability for listing even if they complied with the basic eligibility requirements. It was emphasized that the Exchange did not have a bright-line test to identify the characteristics of suitability and the Exchange retained the discretion to reject a listing application on the grounds of suitability.
In 2016, the Exchange considered amending the Listing Rules to address specific issues and structures relating to backdoor listings. This was in order to prevent the circumvention of the Listing Rules. The Report suggested that the Exchange expects to publish a draft consultation paper addressing the problem of backdoor listing and other relevant issues (e.g. shell activities) in 2017.
The Exchange noted a significant increase in capital raising activities in relation to highly dilutive rights issues and open offers that were not conducted in a fair and equitable manner. In December 2016, the Securities and Futures Commission (SFC) and the Exchange issued a joint press release to announce that they would be closely monitoring the situation.
In January 2017, the Exchange and SFC published a joint statement to address the price volatility of GEM stocks. This is an initial step to address some recent concerns regarding GEM IPO placings. A broader reform of GEM, including a holistic review of the positioning of GEM will be conducted in the context of the Exchange’s strategic plan to create a new board.
A major clarification regarding pre-IPO investment was in relating to the 180-day delay rule. This was amended to a 120-day delay rule. Under the new rule, which took effect in March 2017, listing will now only take place 120 clear days after the exit or completion of the last pre-IPO investment if the completion of the pre-IPO investment was within 28 days of the first filing submission and the relevant pre-IPO investor remained a shareholder at the time of the submission.
Review of thematic approach to enforcement
The enforcement themes of the Listing Rules were expanded from five themes to seven themes in February 2017 following an earlier review of the relevant policy statement. The following enforcement themes were modified, expanded or introduced:
- A director’s performance of fiduciary duties and failure to cooperate with the Exchange remained as themes;
- (1) Late financial reporting was expanded to delays and internal control issues and (2) a director’s or issuer’s failure to address the Exchange’s concern regarding the timely resumption of trading was expanded to cover prolonged trading halts; and
- New themes were introduced concerning (1) inaccurate, incomplete or misleading disclosure in corporate communication; (2) failure to comply with procedural requirements regarding notifiable/connected transactions; and (3) repeated breaches of the Listing Rules.