The local securities market in the last quarter was characterised by uncertainty and gloom, due partly to global market upheavals and partly to policy reform announcements by the Hong Kong industry regulators. Such reforms relate to the listing approval process and, more controversially, certain circumstances that may lead to a company losing its listing status.
A revised adjudication structure
In May The Stock Exchange of Hong Kong Limited (Stock Exchange) announced proposals to reorganise the adjudication structure for various matters relating to listing approvals and listed companies.
Among the proposed reforms were abolishing the Listing Committee and putting in its place "one-stop listing decision making" and "one-stop appeals".
It will be remembered that, whilst the front-line work in processing listing applications and enforcing the Listing Rules is handled by the Stock Exchange’s internal Listing Division, the power to approve a listing rests with the Listing Committee (or, in the case of the Growth Enterprise Market (GEM), the GEM Listing Committee). The Listing Committee currently comprises representatives from listed companies as well as industry professionals such as brokers, investment bankers, fund managers and accountants.
The current structure
Firstly let’s look at the listing approval structure in force today. Currently, a listing application goes first to the Listing Division. The Listing Division may reject the application or recommend it to the Listing Committee. The applicant may have a ruling of the Listing Committee reviewed by the Committee twice (in the second instance the Listing Committee sits as the Listing (Review) Committee). Where the application is rejected on the ground of unsuitability for listing, the decision may be reviewed firstly by the Listing (Review) Committee and finally by the Listing Appeals Committee.
Many other kinds of non-disciplinary matters come under the jurisdiction of the Stock Exchange. Generally speaking, the adjudication structure for listing approvals applies also to other non-disciplinary matters.
The adjudication process for disciplinary matters relating to listed companies is similar, but not entirely the same. Under the current rules, an investigation is first carried out by the Listing Division. Where there is a potential breach of the Listing Rules, the matter is referred to the Listing Committee. The decision of the Listing Committee is subject to its own review and an appeal to the Listing Appeals Committee.
The May proposals
In May this year, the Stock Exchange proposed certain modifications to the current system. The changes included the setting up of a new division and two new governance committees, as well as a re-distribution of the functions and duties of the various units. The aim of the proposals was to remove the complicated review and appeal structure and replace it with a simpler process involving fewer adjudication authorities. The proposed reforms would also involve the abolition of the current Listing Committee and Listing Appeals Committee.
Under the May proposals, listing matters would continue to be handled by the Stock Exchange’s internal Listing Division. Applications for listing, as well as other non-disciplinary matters, would be considered firstly by an "internal group" comprising executives in the Listing Division and the Chief Executive of the Stock Exchange. Decisions of this internal group would be subject to appeals to a new Listing Matters Committee (LMC), which would comprise non-executive directors of the Stock Exchange and external market professionals In relation to disciplinary matters, when the Listing Division found a potential breach of the Listing Rules, it would refer the matter to a new Adjudication Division to be set up for this purpose. The decisions of the Adjudication Division would be subject to appeals to another new governance committee, the User Appeal Committee (UAC), which would again comprise non-executive directors of the Stock Exchange and external market professionals.
The May proposals revised and re-issued
Implementation of the May proposals was planned for later this year. Much controversy, however, was stirred up after the initial announcement over the abolition the Listing Committee.
The proposals were therefore modified. On 24 July 2002 the Stock Exchange released the revised plans in the form of a 3-pronged programme:
a) a new Listing Committee
– there will be a re-constituted combined Listing Committee for both the Main Board and GEM
– the Stock Exchange, listed companies, financial intermediaries and investors will have representation on the committee
– the new Listing Committee will commence operation on 1 January 2003
b) a streamlined listing process
– the Listing Division will continue to process non-disciplinary matters (including listing applications), subject to the approval of the Listing Committee and appeal to the LMC, renamed as the Listing Policy and Appeals Committee
– for disciplinary matters, the Listing Division again takes the front-line investigatory role, with suspected cases of rule breaches to be referred to the new Adjudication Division, whose decisions are subject to appeals to the UAC, renamed as the Disciplinary Appeals Committee
c) strengthening of back-end enforcement of disclosure requirements
– the prospectus-vetting process, including the staffing arrangements, will be reorganised
– during the prospectus-vetting process, managers at the Stock Exchange will comment only on principal issues and leave ancillary matters, such as consistency and presentation of the prospectus, to the listing applicant and its advisers
– issuers and advisers will be held strictly to the timelines for document submission set out in the Listing Rules
Subject to relevant amendments to the rules and appointment of personnel, his three-pronged programme will be implemented in stages towards the last quarter of this year.
Market professionals engaged in listing work should beware the back-end enforcement issue. The Stock Exchange said that there will be a clearer division of work between the Listing Division and the listing sponsors. Listing applicants and their sponsors will be held responsible for the standard and quality of prospectuses, whilst the quality of the sponsors themselves will also be a target for closer regulation. As far as the degree of professionalism expected of advisers working on listings is concerned, the Stock Exchange seems settled on a major break with the past.
Finally, it is important to note that none of the proposals discussed above are intended to alter the standards which a company is required to meet before its securities can be listed in Hong Kong.
Continued compliance with listing criteria
On 25 July the Stock Exchange released plans to tighten up the listing eligibility rules for the Main Board in a new consultation paper, the "Consultation Paper on Proposed Amendments to the Listing Rules Relating to Initial Listing and Continuing Listing Eligibility and Cancellation of Listing Procedures".
The consultation paper is in five parts: (a) initial listing eligibility criteria, (b) continuing listing eligibility criteria, (c) continuing obligations, (d) cancellation of listing procedures and (e) disclosure requirements at the time of initial listing. The proposed rules affect different stages of the life of a listed company on the Main Board:
(a) when a listing is first sought
Firstly, the Stock Exchange aims to impose a sufficiently high initial threshold. Examples of the proposed new criteria include:
- in addition to the current requirement for management continuity during the 3-year track record period, continuity of ownership and control for at least the most recent year will be required
- new quantitative tests based on market capitalisation, revenue and cash flow will be introduced to assess the listing applicant’s financial performance, as alternatives to the current profit test
- sufficient working capital for current needs and at least the next 12 months
- at least 300 shareholders
- minimum issue price of HK$ 2 The Stock Exchange also plans to impose additional disclosure requirements at the time of listing. These include, for example, details about over-allotment options and price stabilisation activities, the company’s corporate governance practices during the track record period and whether it is able to carry on its business independently from its controlling shareholders.
(b) after a company is listed – how to stay listed
The Stock Exchange seeks to ensure that companies that are already listed continue to comply with certain criteria. Failure to comply may result in the company being de-listed. Some examples of the circumstances that may lead to de-listing are:
- the company being loss-making for three consecutive years and having negative equity
- the company being loss-making for three consecutive years and having an average market capitalisation of less than HK$ 50 million over 30 consecutive days
- the company having an average market capitalisation of less than HK$ 50 million over 30 consecutive days and a shareholders’ equity of less than HK$ 50 million
- the company or its principal subsidiaries being served with a winding up order or becoming the subject of other insolvency proceedings
- the moving average of the company’s daily volume-weighted share price over 30 consecutive days being less than HK$ 0.5
These "continuing listing eligibility criteria", i.e. minimum standards that the company must meet in order to maintain its listing, proved to be extremely unsettling for the market. In particular, the minimum requirement for a HK$ 0.5 minimum share price sparked off a panic dumping of penny stocks, causing disruption and much discontent. Reacting to the generally hostile public reception, the Stock Exchange has withdrawn for separate consideration the entire chapter of the consultation paper on continuing listing eligibility criteria.
(c) after a company is listed – disciplinary proceedings
Separate from but related to the issue of "how to stay listed", the Stock Exchange has proposed certain additional continuing obligations. Failure to perform such obligations may lead to disciplinary action against the truant company but will not necessarily result in its being de-listed. Such obligations include, for example:
- maintaining the same public float as that existing at the time of listing
- maintaining at least the minimum number of shareholders required at the time of listing
- publishing financial results on the due date
(d) when a company is to be de-listed
The Stock Exchange also proposes to streamline the de-listing procedure. For example, a company that is in danger of being de-listed will be given an opportunity to submit not more than one proposal (as opposed to multiple proposals currently permitted) within a specified period for bringing itself back to long-term compliance with the listing criteria.
Also proposed are time frames for completing the de-listing procedure. Where no proposal is made for turning the company around (or where the proposal made is rejected by the Stock Exchange), de-listing will take place within 6 months; where a proposal has been made and approved, but the company fails to implement it, de-listing will take place within 12 months.
At the time of writing, the proposals discussed above are still under public consultation. Depending as much on how the market reacts as the feasibility of the rules themselves, they may not be put into practice some time yet, if at all.
© Herbert Smith 2002
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