India is now included as an “acceptable jurisdiction” by The Stock Exchange of Hong Kong Limited (the “HKEx”). The HKEx also published a new “Country Guide – India” (the “India Guide”) relating to India-incorporated issuers. India-incorporated issuers seeking to list in Hong Kong are now able to list their depositary receipts (“DRs”) on the Main Board of the HKEx. This provides an opportunity for Indian issuers to access a wider pool of Chinese and international investors.
Listing of overseas companies in Hong Kong is regulated by two independent entities:
- the HKEx, a wholly owned subsidiary of the Hong Kong Exchanges and Clearing Limited, which, among other things, operates the securities and derivatives markets and related clearing houses and is the frontline regulator of listed companies in Hong Kong; and
- the Securities and Futures Commission (the “SFC”), which is an independent statutory body set up to regulate Hong Kong’s securities and futures markets.
The Rules Governing the Listing of Securities on the HKEx (the “Listing Rules”) require an overseas company to demonstrate that its jurisdiction of incorporation has shareholder protection standards at least equivalent to those of Hong Kong. If this is not possible, overseas companies can achieve equivalent standards by varying their constitutive documents to provide them.
The Listing Rules are promulgated and implemented by the HKEx. The Listing Rules recognize Hong Kong, the People’s Republic of China, the Cayman Islands and Bermuda for the purpose of eligibility for listing as “recognized jurisdictions”.
In September 2013, the HKEx and the SFC issued a new Joint Policy Statement Regarding Listing of Overseas Companies (the “JPS”)1, which superseded an earlier joint policy statement issued in 2007 and guidance provided subsequently by the HKEx. The JPS’s objective is to assist overseas companies seeking either a primary or secondary listing in Hong Kong. The JPS provides guidance in relation to:
- shareholder protection standards;
- regulatory cooperation arrangements;
- accounting and auditing related and other disclosure requirements;
- certain practical and operational matters; and
- suitability requirements for a secondary listing.
The JPS sets out two requirements for overseas companies to be accepted for listing on the HKEx:
- Regulatory cooperation agreements: an overseas company must demonstrate the securities regulator in the overseas company’s jurisdiction of incorporation and place of central management and control (if these are different) has either:
- signed the International Organization of Securities Commission’s Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (the “IOSCO Memorandum”); or
- entered into a bi-lateral agreement with the SFC.
- Acceptable jurisdiction: an overseas company must come from an “acceptable jurisdiction”, i.e. the HKEx must be satisfied that the overseas company’s jurisdiction provides for standards of shareholder protection equivalent to those in Hong Kong.
As at the date of this eUpdate, the Listing Committee of HKEx has approved, in principle, 24 acceptable jurisdictions of incorporation (“Acceptable Jurisdictions”).2 India has been a full signatory to the IOSCO Memorandum since April 2003.3 India, however, was included as an Acceptable Jurisdiction by the HKEx only in November 2015.
The HKEx publishes a country guide for each Acceptable Jurisdiction setting out guidance on how companies incorporated there can meet the requirement for equivalent shareholder protection standards in the Listing Rules.
The HKEx has published a separate India Guide4 for India-incorporated issuers.
Under Indian laws, Indian issuers are not permitted to list their shares outside India. This restriction does not apply to DRs. The Depositary Receipts Scheme, 20145 permits Indian issuers to list DRs overseas without being listed in India. Currently, there are no disclosure requirements set out in the Depositary Receipts Scheme, 2014 in relation to listing by Indian issuers of DRs outside India.6
The India Guide applies to India-incorporated issuers applying for primary and secondary listings on the Main Board of the HKEx. The HKEx does not accept applications for listing by DR on the Growth Enterprise Market (“GEM”). The India Guide must be read in conjunction with the Listing Rules and the JSP. In addition, on submission of their listing applications, Indian issuers are required to confirm to the HKEx that the Indian laws, regulations and market practices set out in the India Guide remain applicable, or provide details of any changes. They must also inform the HKEx of any other Indian laws, regulations and market practices that are relevant to their particular circumstances.
Shareholder protection standards
The JPS sets out key shareholder protection standards required of overseas applicants. The India Guide states that Indian shareholder protection standards on matters that require shareholders’ approval (such as matters requiring a super majority vote, the increase in the liability of an individual member and the appointment, removal and remuneration of auditors) and proceedings at general meetings are materially similar to those in Hong Kong. Certain differences were noted in the India Guide such as the lower voting threshold required to approve a voluntary winding up of an Indian issuer and the limited right of proxies under Indian law to speak at general meetings and creditor meetings. Indian issuers are required to demonstrate how these matters are addressed in their constitutional documents and elsewhere to conform to the JPS requirements.
Practical and operational matters
The JPS contains guidance on the following practical and operational matters:
- an overseas company’s ability to comply with Hong Kong’s rules and regulations;
- the eligibility of securities for deposit, clearance and settlement in Hong Kong’s Central Clearing and Automated Settlement System (“CCASS”);
- cross border clearing and settlement;
- the use of DRs to overcome operational and legal difficulties in listing of shares in Hong Kong;
- disclosure of taxation issues; and
- requirements in relation to stock name identification.
The India Guide contains further guidance relating to registers of securities and depositary programs of Indian issuers and underlines that:
- the Hong Kong depositary must be a suitably authorized and regulated financial institution acceptable to the HKEx;
- the deposit agreement must be in a form acceptable to the HKEx, and an Indian issuer must consult the HKEx early on its terms;
- the governing law of the deposit agreement must be either Hong Kong or one that is generally used in accordance with international practice; and
- the listing documents must include:
- full details of rights and obligations of DR holders;
- the associated risks to the Indian issuer and its DR holders; and
- the full details of the clearing and settlement arrangements and the roles and responsibilities of any domestic depositary, the Hong Kong depositary and CCASS.
The India Guide also notes that there is an inconsistency between:
- the Listing Rules’ requirement that a listed issuer’s constitutional documents must provide that rights attaching to shares will not be impaired by reason solely that interested holders have failed to disclose their interests to the issuer; and
- Indian law, which subjects beneficial holders to a monetary fine if they do not disclose the nature of their interest to the company and the names of the registered holders, among other matters.
The HKEx is prepared to grant a waiver from strict compliance with the above mentioned requirement of the Listing Rules to the extent it would contravene Indian law.
Accounting and auditing
Indian issuers must either:
- submit the accountants’ reports and financial statements that conform to the Hong Kong Financial Reporting Standards or the International Financial Reporting Standards or, for applicants seeking a secondary listing, general accepted accounting principles of the United States of America; or
- demonstrate to the HKEx that the Indian generally accepted accounting practices and auditing standards are comparable to those required in Hong Kong.
The India Guide does not contain an analysis of tax matters, but states that Indian issuers are expected to disclose the following in their listing documents7:
- details of any Indian withholding tax on distributable entitlements or any other tax, including the applicable rates, which is payable by investors on its securities;
- details of any treaty between India and Hong Kong that may affect any taxes payable;
- the effect of holding DRs through CCASS or outside CCASS on any tax payable (where applicable); and
- procedures for claiming any tax relief or exemption.
To date, there are no India-incorporated issuers listed on the HKEx. With the formal recognition of India as an Acceptable Jurisdiction and the issuance of the India Guide, Hong Kong may now be seen as an attractive listing alternative for Indian issuers. There may be technical difficulties to listing given the differences between the Indian and Hong Kong legal systems and rules, and an early engagement with sponsors, counsel and the HKEx may be helpful.