The Securities and Futures Commission (“SFC”) invites market participants to provide their comments on the proposed amendments to the Guidelines for the Exemption of Listed Corporation from Part XV of the Securities and Futures Ordinance (Disclosure of Interest) (the “Guidelines”).
Under Part XV of the Securities and Futures Ordinance (“SFO”), substantial shareholders (i.e. persons who have an interest in shares comprising 5% or more of the voting shares in a corporation listed in the Stock Exchange of Hong Kong Limited (“SEHK”)) and other corporate insiders such as the listed corporation’s directors, shadow directors and chief executives, must give notice of their interest in shares of the listed corporation on the occurrence of certain events.
Under the current Guidelines, there are three categories of circumstances under which an exemption from disclosure under Part XV of the SFO may be granted. The three current categories are:
- Category 1 relates to dual-listed corporations that in some cases either have no share trading or only have nominal trading on the SEHK, or in other cases the corporate insiders of such corporations are subject to overseas statutory disclosure of interest obligations that are comparable to those of Part XV;
- Category 2 covers issuers of securities other than shares; and
- Category 3 covers open-ended corporate form collective investment scheme.
In light of the recent arrangement between the SFC and the China Securities Regulatory Commission for establishing mutual stock market access between Mainland China and Hong Kong named the “Pilot Programme”, the SFC proposes to amend the Guidelines by providing two additional categories for the exemption:
- Category 4 will cover transactions entered into under the name of a SEHK participant under certain circumstances; and
- Category 5 will cover participants of a recognized clearing house who are themselves clearing houses subject to certain conditions.
The Pilot Programme will operate between Shanghai Stock Exchange (“SSE”), SEHK, China Securities Depository and Clearing Corporation Limited (“ChinaClear”) and Hong Kong Securities Clearing Company Limited (“HKSCC”), so investors in each of these markets will be able to trade eligible shares listed on the other markets through local securities. In the case of Northbound Trading Link, Hong Kong investors will be able to place orders to trade eligible shares listed on the SSE by routing orders to SSE through its own brokers and a securities trading service company to be established by SEHK. In the case of Southbound Trading Link, eligible Mainland investors will be able to place orders to trade eligible shares listed on the SEHK by routing to SEHK through Mainland securities firms and the Special Purpose Vehicles (“SPVs”).
The SPVs will be admitted as a participant of the SEHK, and ChinaClear will be admitted as a participant of HKSCC for the purpose of clearing, settlement, custody and nominee service with respect to SEHK-listed securities that are executed by the SPV will be provided by ChinaClear. Hence, they will be deemed to be subject to the disclosure requirement under Part XV of the SFO if they hold 5% or more in a SEHK listed corporation.
The purpose of the proposed Category 4 is to allow the SPV to be eligible for exemption under section 309(2) of the SFO, during the course of normal business under the Pilot Programme. The SPV will acquire an interest in the securities when executing trades as the agent of the client which may trigger the disclosure requirement under Part XV of the SFO. For Category 4 exemption to apply, the relevant interest must be acquired by the SEHK participant as an agent for the buyer, where neither the buyer nor the seller can be a related corporation of the agent. The exchange participant must not be interested in the shares for more than three business days.
The proposed Category 5 will cover the clearing house which is regulated by a regulator in its home market given the home market regulator has entered into a memorandum of understanding with the SFC. The exemption will only apply to Hong Kong listed securities held by the clearing house that are incidental to the clearing and settlement services or are held for beneficial investors. Since the functionality of performing clearing and settlement as well as depository and nominee services for investors of an overseas clearing house is similar to that of a recognized clearing house, ChinaClear will be covered under Category 5 and be eligible for exemption.
The Pilot Programme is a major step towards opening up the capital market in Mainland China. The proposed amendments are meant to provide a level playing field for entities that perform similar functions in the market to facilitate the implementation of the Pilot Programme.