Transcript Strategic Challenges Facing HKEx

Enhancing the Quality of Primary Market in
Hong Kong
Paul Chow
Chief Executive, HKEx
20 November 2004
Conference on Asia's Financial Centre – Challenges & Opportunities
Canadian Certified General Accountants Association of Hong Kong
Agenda
1. Hong Kong Securities Market
2. Recent Initiatives in Enhancing Quality of Primary Market
3. Conclusions
2
Global situation analysis: Fundamentals of a securities
Today’s focus
market
Key Drivers
Participants
Supporting mechanisms
Regulatory
Framework
Market
quality
Issuers
Listed companies
Enhance
investor
confidence
Intermediaries
Attract order
flow
Increase
liquidity
Sponsors & IFAs
Exchange/Clearing
participants
Professionals
Investors
Retail
Institutional
Market
Infrastructure
Companies
Ordinance
(Companies
Registry)
Statutory Rules
(SFC)
Listing Rules
Corporate
Governance
Business culture
& environment
Director quality
Management
expertise
Self regulation
Product & service
Licensing
regime (SFC)
Operational
efficiency
Exchange &
Clearing Rules
System reliability
& efficiency
Risk management
Investor
protection
Disclosure &
transparency
Investor education
Information
dissemination
Transaction costs
3
Regulatory framework: Listed companies in HK are
governed by a 3-tier regulatory system
Roles
Government
SFC
HKEx
Checks & balances

Set overall policy direction

Executive Council

Initiate legislation

Legislative Council

Statutory regulator

Process Review Panel

Market watchdog


Administer the Codes on Takeovers
and Merger and Share Buybacks
Securities and Futures Appeals Panel &
Tribunal

Independent committees & panels

Regulate HKEx

Judicial review

License sponsors and IFAs

Review by Independent Commission
Against Corruption (ICAC)

Frontline regulator


Public organisation
Oversight by SFC (via SFO & various
MOUs)

Business entity

Balanced board structure

Administer the listing rules

Independent Listing Committee and
Listing Appeals Committee

Administer trading/clearing rules (for
market operations)

Independent committees & panels

Judicial review

Review by ICAC
4
HKEx’s Listing function: Safeguard measures ensure
checks and balances
Safeguard
measures
SFO
Description

HKEx shall give precedence to the public interest over its own interests

Appointment of HKEx Chairman (elected by HKEx Board) requires approval of CE
of HK SAR

Appointment of HKEx CE (appointed by HKEx Board) requires approval of SFC

Dual filing
All HKEx’s fees and charges relating to listing activities and new and amendments
to listing rules require approval of SFC

SFC has power to give directions to HKEx if it deems appropriate (SFC needs to
consult with FS in cases of issuing restriction notices and suspension notices )

SFC can introduce and make amendments to any listing rules after consulting FS
and HKEx

Listing application materials submitted to SEHK are also filed with the SFC

The SFC has the power to make comments on and object to a listing application
5
HKEx’s Listing function: Safeguard measures ensure
checks and balances (cont’d)
Safeguard
measures
MOU on
Listing
Matters
Description

SEHK has delegated all its listing decision making powers to the Listing Committee
(“LC”) assisted by the Listing Division

LC approves new listing applications, new and amendments to policies and the
cancellation of any listing

Independence of LC is secured by the Listing Nomination Committee, on which
HKEx and SFC are equally represented

MOU for the
Listing of
HKEx
Balanced
Board
Continuous oversight by SFC of HKEx’s performance of its listing responsibilities,
including monthly reporting, monthly liaison meetings and periodic audits

A Conflict Committee is established to review any situation where concerns are
raised that HKEx may have a conflict of interest

HKEx as a listed company is regulated by SFC, not by SEHK

All board members (except HKEx CE) are INEDs (as confirmed by SFC)

Government appoints 6 Public Interest Directors and shareholders elect 6
Directors
6
Hong Kong securities market has 2 distinct characteristics
Implications
Highly concentrated
corporate ownership
Many non-Hong-Kongbased companies

Agency problem not a substantial issue

Connected party transaction a potential issue

INEDs may not be truly independent if
appointed by major shareholders

Difficult to deal with misdemeanours due to
separate legal systems

Difficult to undertake investigations if individuals
and evidence are located outside home
jurisdiction
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Hong Kong’s solution is to adopt a primarily disclosurebased regulatory regime
Elements of the disclosure-based regulatory regime in Hong Kong

Listing criteria
Continual obligations of
listed issuers & directors
-
Quantitative requirements - profit track record
-
Qualitative requirements - appropriate management
experience & suitability of business

Listed issuers obliged to maintain adequate procedures,
systems and controls to enable them to comply with the
Listing Rules

Directors obliged to understand their responsibilities under
the Listing Rules

Timely & accurate information dissemination

Quality assurance
Companies allowed to list if comply with requirements stated
in the Listing Rules
Disclosure-based regime – up to market to judge the quality
of listed issuers

Competence of preparers of financial information and
auditors

Sufficient powers available for regulators to pursue and
invoke effective sanctions for wrongdoings post event
8
Agenda
1. Hong Kong Securities Market
2. Recent Initiatives in Enhancing Quality of Primary Market
3. Conclusions
9
Hong Kong has undertaken a number of key CG initiatives
recently
2004
Jan
1. Amendments to
Listing Rules relating
to CG issues

HKEx issued amended
rules on 31 Jan 2004

Effective on 31 Mar
2004
2. Revised Code on
CG Practices & CG
Report

HKEx issued draft
amended rules on 31 Jan
2004

Finalised rules published
on 19 Nov 2004

To be effective on 1 Jan
2005
2005
Mar
Apr
Oct
3. Enhancing the
Regulation of Listing
4. Enhancing
regulation of the
accounting profession
5. Strengthening
regulation of
sponsors and IFAs

Government
Consultation concluded
on 26 Mar 2004

FSTB proposed the
establishment of IIB
and FRRP

Implementation in
progress by
Government, SFC &
HKEx

Government, SFC,
HKICPA and HKEx
agreed to fund IIB and
FRRP

HKEx & SFC published
Consultation
Conclusions on 19
October 2004

Phase 1 completed:
-
HKEx published rules
amendments on 19
October 2004
-
To be effective on 1 Jan
2005

Phase 2 to be
completed by the SFC
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1. Amendments to Listing Rules related to CG issues
Key elements
Directors & senior
management

Increase number of INEDs from 2 to 3

Require at least 1 INED with appropriate
professional qualifications/accounting/related
financial management expertise

Require to set up Audit Committee

Disclosure
-
Comprise NEDs only; majority INEDs
-
Minimum 3 members
-
At least 1 INED with relevant financial
management expertise
-
Chaired by an INED
Mandate disclosure of individual directors’
remuneration on a “named” basis

Enhance Listing Rules provisions on notifiable
transactions and connected transactions

Quarterly Reporting for MB issuers NOT required
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1. Amendments to Listing Rules related to CG issues (cont’d)
Key elements
Continuing listing
obligations

Require subsequent refreshments of general
mandate be subject to independent
shareholders’ approval

Extend voting by poll to connected transactions
and transactions that require controlling
shareholders to abstain from voting

Introduce alternate financial standards to the
profit requirement:
Initial listing
obligations
-
Market capitalisation/revenue test
-
Market capitalisation/revenue/cash flow test

Increase minimum number of shareholders
required of MB issuers to 300

Increase required minimum number of
shareholders to 1,000 for applicants under
market capitalisation/revenue test
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2. Revised Code on Corporate Governance Practices &
Corporate Governance Report (cont’d)
Key elements

Make reference to UK Combined Code &
recommendations by SCCLR

Consist of two tiers of compliance:
Structure

-
Code Provisions - require to comply or explain noncompliance in CG Report
-
Recommended Best Practices - compliance
encouraged but disclosure of non-compliance
voluntary
Contain 5 sections covering:
-
Directors
-
Directors’ remuneration
-
Accountability and audit
-
Delegation by the Board
-
Communication with shareholders
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2. Revised Code on Corporate Governance Practices &
Corporate Governance Report (cont’d)
Key elements
Code provisions –
examples

Hold Board meeting on a quarterly basis

Separate roles of chairman and chief executive
officer

Establish a remuneration committee; a majority of
the members should be INEDs

Conduct a review of the effectiveness of the
system of internal control

Explain the procedures for demanding and
conducting a poll by the Chairman
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2. Revised Code on Corporate Governance Practices &
Corporate Governance Report (cont’d)
Key elements
Recommended best
practices – examples

Arrange appropriate insurance cover in respect of
legal action against its directors

Appoint INEDs representing at least one-third of
the board

Establish a nomination committee, a majority of
the members of which are INEDs

Directors should participate in a programme of
continuous professional development

Disclose details of any remuneration payable to
senior management on an individual and named
basis

Disclose the division of responsibility between the
board and management
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3. Enhancing the Regulation of Listing
Key elements
Codification of
certain Listing Rules
in statue


Transparency/
accountability of
Listing functions

Proposed statutory-backed Listing Rules include:
-
Regular financial reporting obligations of listed
companies
-
Disclosure obligations in relation to corporate
transactions (particularly connected transactions)
-
Obligation to disclose price-sensitive information
To be enforced by SFC
Publish SFC’s annual audits of HKEx’s
performance of listing functions

Implement measures to enhance transparency of
listing decisions (e.g. Listing Committee Annual
Report, issuance of decision letters)

Invite ICAC to conduct independent study of the
SFC’s Dual Filing Team and HKEx’s Listing
Division/Listing Committee
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4. Enhancing regulation of the accounting profession
Key elements
Independent
Investigation Board
(IIB)
Financial Reporting
Review Panel (FRRP)

Consider complaints of alleged accounting,
auditing and ethics irregularities committed by
professional accountants involving listed entities

Inquire into apparent departures from the law
and accounting standards in the annual
accounts of companies

Seek remedial action
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5. Strengthening regulation of sponsors and IFAs
Key elements
Phase 1:

Specify appointment requirements
Appointment and role
& responsibilities of
compliance advisors,
sponsors and IFAs

Clarify definition of independence

Clarify expectation on due diligence

Emphasis on internal controls assessment by
sponsor

SFC to conduct an investor survey

SFC to consult the market on:
Phase 2:
Enhancing SFC
regulatory regime
-
Eligibility criteria
-
Ways to further enhance its licensing, inspection
and enforcement functions
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HKEx Listing Division is introducing a number of
initiatives to enhance its operations
Key elements
2004 achievements
Tentative 2005
initiatives
* On-going initiative continues in 2005

Streamline IPO vetting process*

Refine compliance & monitoring practices*

Streamline enforcement process*

Implement case database for Listing Division*

Enable e-Submission of IPO forms*

Publish Listing Committee Annual Report

Review role & structure of Listing Committee

Introduce a more effective mechanism for
delisting

Facilitate simultaneous listing of A & H-shares

Publish decision letters
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Conclusions
Current status

Hong Kong operates a disclosure-based regime

Major reforms are underway in Hong Kong to further
enhance quality of primary market

Enhancing market quality is not solely a matter of rules
and regulations – it is partly a matter of ethics, of culture
and of people

However, rules and regulations can influence corporate
behaviour

The regulators can help promote market quality by
strengthening enforcement and raising public awareness
through education and training

Our ultimate goal is to establish a compliance culture
where directors, market participants and professionals all
want to behave well themselves
Purpose of rules and
regulations
Role of regulators
20
Thank you
Copy of this presentation is available @ www.hkex.com.hk
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