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Clinton Morrow

Calvin Ho

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Listing on the Hong Kong Stock Exchange

Introduction

Issue

  • Whether there would be real interest in listing funds under Chapter 21
  • If the Exchange were to implement relevant changes

What we will touch on:

  • The background to Ch.21
  • Possible changes to the current regime to attract more funds to list under the Ch.21 regime
  • Comparable requirements in other fund jurisdictions
  • The issues for discussion

Current Routes to Listing

  • Ch.20 & Ch.21 Main Board Listing Rules

Chapter 20 Listings

  • Listing of funds authorized by the Securities and Futures Commission (SFC)
  • Subject to restrictions in the SFC’s Code on Unit Trusts and Mutual Funds (the UT Code)
    • Investment restrictions
      1. fund’s holding of securities of any single issuer cannot exceed 10% of its total net assets (by value)
      2. a cap of 10% on the number of ordinary shares a fund can hold in any single issuer
      3. a cap of 15% of a fund’s total net asset value on the value of its holding of securities that are not listed, quoted or dealt in on a market
    • Restriction on borrowing
      1. a fund cannot borrow more than 25% of its total net asset value
  • Excluding Real Estate Investment Trusts (REITS), all Ch.20-listed funds except one are open-ended, including many Exchange Trade Funds (ETFs) in Hong Kong

Chapter 21 Listings

  • Not authorized by the SFC
  • Not subject to the UT Code
  • Cannot be marketed or offered to the public in Hong Kong
  • Can be offered offshore or to “professional investors” in Hong Kong
  • Securities and Futures Ordinances (SFO) definition of “professional investors” includes:
    • Institutional investors
      • including banks, regulated intermediaries, pension funds, insurance companies, authorized funds etc.
    • High net worth investors
      • individuals with a portfolio of at least HK$8 mln (or the foreign currency equivalent)
      • companies with a portfolio of at least HK$8 mln (or the foreign currency equivalent) or total assets of at least HK$40 mln (or its equivalent)

Reasons for Listing under Chapter 21

Permanent Capital

  • Closed to new capital
  • Raised capital is not redeemable by investors

Increased Liquidity

  • Tradable on secondary market in the Exchange
  • But subject to restriction on board lot size

Transparency

  • Ch.21 contains comprehensive disclosure requirements
  • Scrutiny of the Exchange gives a stamp of respectability to funds from unregulated jurisdictions

Less Stringent Regulatory Requirements

  • No need to be SFC-authorized or to comply with UT Code

Reasons for Listing under Chapter 21 (cont’d)

Less Restrictions on Investments

  • 2 key restrictions
    1. reasonable spread of investments: value of investment in any one body must not exceed 20% of the fund’s NAV at the date of investment (LR21.04(3)(b))
    2. a fund cannot, either alone or with any connected person, take legal, or effective, management control of its underlying investments and, in any event, must not own or control more than 30% of the voting rights in any single company or body (LR21.04(3)(a))
  • Other Restrictions
    • no change in the investment objectives, policies and additional restrictions without prior shareholders’ consent for 3 years after the initial listing (LR21.04(5))
    • a person cannot control more than 30% of the votes exercisable at any general meeting of the fund (LR21.04(4))
    • funds are allowed to adopt additional restrictions (eg. borrowing powers)

Reasons for Listing under Chapter 21 (cont’d)

Attraction of a Chapter 21 Listing

  • “Technical listings” – for funds to be marketed outside Hong Kong
  • Ch.21 listing will attract institutional investors whose investment mandates only permit investment in listed securities
  • Some jurisdictions offer favourable tax treatment to investments in listed funds e.g. Japan

Restrictive Regime (cont’d)

  • Exchange’s Guidance Letter HKEx-GL17-10 imposes restrictions to ensure Ch.21 funds marketed only to professional investors

Restrictions imposed by Guidance Letter

Minimum Board Lot and Subscription Size

  1. Funds must have a board lot size and minimum subscription size of at least HK$500,000 (subject to adjustment for special circumstances)
  2. Intermediaries selling interests in Ch.21 funds must satisfy themselves that buyers are “professional investors” within SFO definition

A principles-based approach is allowed for intermediaries’ determination of whether customers meet the qualification thresholds under the Professional Investor Rules

  1. The offering structure must be generally acceptable to the Exchange

Minimum Number of Shareholders

Ch. 21 fund must have at least 300 shareholders, unless a waiver is obtained. No waiver for a listed Chapter 21 company has been granted since 2004 (when required minimum no. of shareholders was increased to 300).

Minimum Market Cap.

Although Ch.21 funds not subject to market cap. requirement under Rule 8.09, in practice minimum market cap. must be HK$150 mln (because of required subscription size of HK$500,000 per placee and required minimum of 300 placees).

Prospectus Registration

Prospectus registration is not required, but where a fund proposes to register a prospectus, it must provide the Exchange with a submission from its sponsor & legal adviser on why the offering document is a prospectus

Note: An offer of shares in a fund to the public requires both the fund and its listing documents to be authorized by the SFC and comply with Ch.20 of the Listing Rules

Conflicts of Interest

Where the executive director is involved in the management of other funds at the same time

Internal control mechanism must demonstrate:

    • Directors have enough time and resources to manage the company
    • Confidentiality maintenance in accordance with professional standard
    • Disclosure of fair process of allocating investment opportunities between the company and other funds in a timely and equitable manner in the listing document

Restrictive Regime (cont’d)

Criticism

  • Regime remained more or less unchanged since introduction in 1989
  • Unfavourable listing environment for funds compared to foreign exchanges, especially the Irish Stock Exchange (ISE) and Luxembourg Stock Exchange (LuxSE)

Minimum of 300 Shareholders Requirement

  • Virtually impossible to achieve
  • Questionable co-existence with Listing Rule 21.04 which exempts Ch.21-listed funds from compliance with minimum public float requirement set out in LR8.08(1)
  • Guidance Letter contemplates possibility of derogation

Restrictive Regime (cont’d)

Share Price

  • Trade at a discount to net asset value
  • reflects the fund’s operational costs (often including the fund manager’s annual fee and performance fee which are deducted before dividend payment)

Tax Treatment

Profits Tax

  • Non-offshore Ch.21-listed fund has to pay HK profits tax
  • SFC authorized funds are exempted from profits tax

Restrictive Regime (cont’d)

Profits Tax (cont’d)

  • Offshore fund may be exempt for:
  • specified transactions, including transactions from which the trading receipts do not exceed 5% of the total trading receipts from the specified transactions and incidental transactions combined; and
  • transactions conducted through or arranged by a specified person
  • “Specified transactions”: include transactions in securities (other than the shares or debentures of a private company)
  • “Specified person”: an entity licensed by the SFC as a licensed corporation, or an authorised financial institution registered as a registered corporation, to conduct regulated activities under Part V SFO

Stamp Duty

  • Unlike ETFs listed under Ch.20, trades of Ch.21-listed shares are subject to stamp duty

Restrictive Regime (cont’d)

Listing Process

  • No streamlined application process in place – can be slow and costly
  • Lack of recent listings – considerable uncertainty in application approval

Conflicts of Interest

  • Often exist between the investment manager and the board of the investment company and between the investment company and the companies in which it invests
  • Principal requirements under the existing regime:
    • at least 1/3 of a listed investment company’s board must be made up of independent non-executive directors (INEDs);
    • the investment manager who must be licensed to conduct regulated activities Types 4 and 9 (advising on securities and asset management, respectively) must comply with the conflict of interest requirements of the SFC’s Fund Manager Code of Conduct and the Code for Persons Licensed by or Registered with the SFC.

Disclosure Requirements

  • The requirement to disclose investments only annually is considered to be insufficient

Disclaimers

  • This presentation is prepared by Charltons based on the information available to Charltons and not for public circulation. All the information is not independently verified by Charltons.
  • Charltons does not accept responsibility or liability for any loss or damage suffered or incurred by you or any other person or entity however caused (including, without limitation, negligence) relating in any way to this presentation including, without limitation, the information contained in or provided in connection with it, any errors or omissions from it however caused (including without limitation, where caused by third parties), lack of accuracy, completeness, currency or reliability or you, or any other person or entity, placing any reliance on this presentation, its accuracy, completeness, currency or reliability. Charltons does not accept any responsibility for any matters arising out of this presentation.
  • As a Hong Kong legal adviser, Charltons is only qualified to advise on Hong Kong law and we express no views as to the laws of any other jurisdictions. All the references to foreign laws herein are for information only and may not be up-to-date.
CH-004721
DM-104552_v6
20210115

Listing funds under Chapter 21 of Hong Kong Listing Rules

Hong Kong Chapter 21 listings

Hong Kong Chapter 21 funds

Listing funds in Hong Kong

Definition of Professional investors in Hong Kong

Hong Kong Professional Investor Rules

Guidance Letter HKEx-GL17-10

Unit trust fund listings in Hong Kong

Fundlistings fund prices

Hong Kong Professional investor funds

Hong Kong professional investor regulated scheme