With the rapid development and further opening up of the Chinese economy, listing on overseas stock exchanges became an important means for PRC companies to access international funds. Since the first listings of Chinese companies’ shares on the Hong Kong Stock Exchange (Exchange) in the 1980s and 1990s, the Exchange has become the overseas listing venue of choice for PRC companies.
Historically, there have been two routes for PRC companies to list on the Exchange: directly by way of an H share listing or indirectly via a “red chip” listing.
H share companies are joint stock limited companies incorporated in the PRC which have received approval from the China Securities Regulatory Commission (“CSRC”) to list in Hong Kong. They are different from so-called red chip companies which are incorporated outside the PRC (usually in Hong Kong, the Cayman Islands or Bermuda), are controlled by PRC entities or individuals and conduct most of their business in the PRC.
For the purposes of quoting statistics, the Exchange uses the term “red chip” to refer to companies incorporated outside the PRC which are controlled by PRC government entities. It uses the term Non-H Share Mainland Private Enterprises to refer to companies incorporated outside the PRC which are controlled by PRC individuals.
To give some indication of the significance of China as a source of IPOs for the Exchange, there were 1,924 listed companies on the Exchange at the end of July 2016. Among them, 980 (or 51%) were Mainland enterprises, including 233 H-share companies, 152 red-chip companies and 595 Mainland private enterprises. Together, Mainland enterprises accounted for 62.6% of the market capitalization and 69.9% of the equity turnover of listings on the Exchange at the end of July 2016.
The Exchange is the world’s 8th largest stock exchange in terms of market capitalization, and the fourth largest in Asia after Japan, Shanghai and Shenzhen. In terms of IPO funds raised, however, Hong Kong ranked first among the world’s exchanges in 2015, continuing a trend that has placed it in the world’s top five for the past 14 years.
There were a total of 138 new listings in 2015, raising HKD 261.3 billion, an increase of 12% from 2014.
There were 63 new listings on the Exchange in the first seven months of 2016, down from 69 in the same period last year.
2. Benefits of Listing
There are many reasons for listing on the Exchange, but specifically in relation to Chinese companies, the following reasons should be borne in mind:
- access to international funds : Hong Kong is a regional and international financial centre, and a base for some of the world’s most successful fund managers;
- active post-listing trading which facilitates subsequent fund-raising. This is attributable to an active interest in, and more in-depth understanding of, the China market due to geographical and cultural proximity, a high concentration of analysts focused on China and the existence of a separate Hang Seng Chinese Enterprise Index;
- securing the interest and confidence of international investors who are familiar with the standards of regulation in Hong Kong;
- enhanced profile and reputation through participation in an international financial centre located in the financial hub of the Asia Pacific region; and
- positive pressure on the management of Chinese issuers to appreciate and follow international standards in terms of transparency and protection of minority shareholders.
3. Shanghai-Hong Kong Stock Connect
The Shanghai-Hong Kong Stock Connect pilot programme was launched in November 2014, allowing certain Mainland Chinese investors to invest directly in Hong Kong listed stocks for the first time. Under the Southbound Trading Link, Mainland investors can trade in the constituent stocks of the Hang Seng Composite LargeCap and MidCap Indexes, and all H-shares with corresponding A shares listed on the Shanghai Stock Exchange.
4. Main Board vs GEM Market
The Exchange has 2 boards – the Main Board and the Growth Enterprise Market or GEM. The Main Board caters for more established companies that are able to meet its profit or other financial requirements. GEM has lower entry criteria and acts as a stepping stone to Main Board listing: there is a streamlined process for GEM listed companies to transfer to the Main Board once they are able to meet the Main Board eligibility criteria.
The post-listing obligations of GEM companies are now broadly similar to those of Main Board listed companies. The principal difference in the ongoing obligations of Main Board and GEM companies is that quarterly reporting is a Listing Rule requirement for GEM companies whilst for Main Board issuers it is still a Recommended Best Practice only (under the Corporate Governance Code).
5. Applicable Hong Kong Laws and Non-statutory Codes
An issuer listing in Hong Kong will be subject to the Rules Governing the Listing of Securities on The Exchange of Hong Kong Limited (the “Listing Rules”), the Companies Ordinance, the Companies (Winding-Up and Miscellaneous Provisions) Ordinance, the Securities and Futures Ordinance; and the Code on Takeovers and Mergers and the Code on Share Buy-backs.
The Listing Rules are as applicable to Chinese issuers as they are to Hong Kong and overseas incorporated issuers. However, in view of the existence of two separate markets (domestic and foreign) for the securities of Chinese issuers, and the differences between the Chinese and Hong Kong legal systems, some additional requirements, modifications and exceptions are set out in Chapter 19A of the Main Board Listing Rules and in Chapter 25 of the GEM Listing Rules, specifically designed for Chinese incorporated issuers (i.e. H share issuers). H shares can be subscribed for and traded in other currencies in addition to Hong Kong dollars.
Red chip companies and non-H share Mainland private enterprises, on the other hand, as companies incorporated outside the PRC, are required to meet the additional requirements of Chapter 19 of the Main Board Rules (Chapter 24 of the GEM Rules) for overseas companies, assuming that they are not incorporated in Hong Kong.
Hong Kong Sponsor Due Diligence Guidelines
In 2013, Charltons led a group of 20 leading Hong Kong corporate law firms and 40 investment banks in the production of the Hong Kong Sponsor Due Diligence Guidelines. The Guidelines provide practical guidance on the due diligence that needs to be conducted on companies listing on the Hong Kong Stock Exchange in order to comply with requirements that came into effect on 1 October 2013.
The Guidelines contain 3 main sections:
- Standards – these are statements of sponsors’ due diligence obligations under Hong Kong’s regulatory regime;
- Guidance – guidance as to the market’s interpretation of the Standards; and
- Recommended Steps – these set out practical steps which would generally be expected to meet the Standards in a typical case.
The Guidelines provide a comprehensive handbook for companies considering a Hong Kong listing and the professional parties involved – sponsors, lawyers, accountants etc. The guidelines incorporate all relevant regulatory standards and guidance from the Hong Kong regulators as well as industry guidance.
The English version of the Due Diligence Guidelines was published in September 2013 and is available free online at http://duediligenceguidelines.com. The Chinese version of the Guidelines is also available free online at http://duediligenceguidelines.cn.
6. PRC Regulatory Requirements for H Share Issuers
The China Securities Regulatory Commission (CSRC) is the regulatory authority responsible for authorizing all overseas listings by PRC incorporated companies1.
The CSRC Guidelines
The CSRC’s “Guidelines for Supervising the Application Documents and Examination Procedures for the Overseas Stock Issuance and Listing of Joint Stock Companies” (the “Guidelines”) came into effect on 1 January 2013. These removed the financial requirements for PRC companies seeking to list overseas in the form of joint stock companies (i.e. H share companies). Previously, Chinese joint stock companies seeking an offshore listing were required to:
- have RMB 400 million of net assets,
- raise US50 million of funds and
- have after-tax profit of more than RMB 60 million in the preceding year (the “4-5-6 Requirements”).
Under the Guidelines, the 4-5-6 Requirements were replaced by a requirement that Chinese joint stock companies seeking an overseas listing must satisfy the CSRC that they meet the listing requirements of the overseas stock exchange.
The 4-5-6 Requirements had previously meant that the H share companies listing in Hong Kong were mainly large state-owned enterprises, since small and medium sized private companies (“SMEs”) found it difficult to satisfy the rules. The Guidelines provided Chinese SMEs with an alternative to a domestic IPO.
The Guidelines also simplified the application process for PRC companies seeking to list overseas. Before they came into force, potential overseas issuers were required to submit to the CSRC all relevant corporate documents for approval 3 months before the submission of the listing application to the overseas exchange (e.g. the submission of A1 form to the Hong Kong Exchange). Under the Guidelines, this requirement was removed.
The Guidelines aimed to ease fundraising pressure on stock markets in the PRC and promote the development of small and medium companies in the PRC.
1 Securities Law (Article 10) and the Special Provisions of the State Council on Issuing and Listing of Shares Abroad by Companies Limited by Shares (Article 5)