During a visit to Hong Kong in August 2011, the Chinese Vice Premier Li Keqiang unveiled a series of initiatives to further strengthen Hong Kong's position as an international financial centre and facilitate the development of offshore RMB business in Hong Kong. In particular, the new developments on repatriation of RMB to Mainland China will be greatly beneficial to the Hong Kong IPO market as they will likely encourage more companies to consider raising RMB in Hong Kong.
In our e-Alert issued in October last year, we discussed the efforts of the Hong Kong Stock Exchange ("HKSE") to develop sustainable markets for RMB products. These include RMB IPOs and the ability of existing listed issuers to make "RMB follow-on offerings" to raise funds in RMB via placement and rights issue/open offer. In this e-Alert, we will go through the latest details on the different models and infrastructure to support the listing and trading of RMB securities on the HKSE.
Under the HKSE's current framework, in RMB IPO, the issuer can choose between three models - STSC (single tranche and single counter), DTSC (dual tranche and single counter) or DTDC (dual tranche and dual counter). Under STSC, the subscription currency for the shares will be in RMB only and upon listing the shares can only be traded in the RMB counter. Under both DTSC and DTDC, the issuer will provide investors with currency options to subscribe for its shares in either RMB or HKD or partly in RMB and partly in HKD. The only difference between DTSC and DTDC is that under DTSC, all trading will only be done in RMB in a single RMB counter whereas DTDC will have dual trading counters for HKD and RMB trading. Although different counters are used for trading of shares in HKD or RMB, the underlying shares being traded are of a single class and will carry the same shareholders' rights. Under the DTDC model, there will be separate ISIN code and HKSE stock code for shares trading at HKD and RMB counters. Shareholders can change the trading counters for their shares by returning their existing share certificates in exchange for new share certificates. CCASS participants who hold shares in CCASS can move their shares between the HKD and RMB counters electronically.
Based on our current discussions with the share registrars, the Hong Kong branch share registrars will maintain separate branch registers for shares traded at each of HKD and RMB trading counters, which is allowed under both Bermuda and Cayman laws. Notations will be made on share certificates to differentiate between shares tradeable at the HKD or RMB counters. The principal share register of the issuer in Bermuda or Cayman will not be affected by this arrangement given that all shares registered at such principal share register are not traded on the HKSE in any case. These arrangements will also apply to existing listed companies doing RMB follow-on offerings resulting in two trading counters.
A RMB offering has significant benefits to the issuer, including the abilities to hedge against an appreciating RMB and deploy capital for Mainland China expansion and can raise the issuer's profile by attracting strong local and international investor appetite.
Given the high level of RMB deposits in Hong Kong (around RMB589 billion by the end of 2011), it is expected that RMB IPOs or RMB follow-on offerings by existing listed companies will attract strong demand and receive high level of investors attention both in Hong Kong and internationally. These offerings will boost the development of an offshore RMB capital market and RMB financial products in Hong Kong.
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