II. QUALIFICATIONS FOR MAIN BOARD LISTING OF H SHARE COMPANIES
The Listing Rules set out the basic requirements that must be met before any initial listing of equity securities on the Hong Kong Exchange.
The issuer must be duly incorporated as a joint stock limited company in China. This is in order to ensure that the issuer is subject to the Chinese Company Law.
(b) Suitability for Listing (Rule 8.04)
The company and its business must, in the opinion of the Exchange, be suitable for listing. This means, for example, that the nature of the company’s business and its management must be in keeping with the standards of integrity which the Exchange endeavours to uphold and that there will be sufficient public interest in the business of the company and in its shares. The Exchange may have concerns if a company is heavily dependent on one product or customer. In such situations, it is advisable to seek a preliminary view of the Listing Committee at an early stage of the application process.
In addition, the Exchange will not normally regard as suitable for listing a company or its group (other than an investment company) whose assets consist wholly or substantially of cash or short-dated securities, except where the issuer or group is solely or mainly engaged in the securities brokerage business. Other factors which the Exchange will take into account in determining suitability are set out in the Exchange’s Guidance Letters HKEx-GL 68-13 and 68-13A.
(c) Operating History and Management
The basic requirement is that a Main Board listing applicant must have a trading record period of at least 3 financial years with:
- management continuity for at least the 3 preceding financial years; and
- ownership continuity and control for at least the most recent audited financial year.
An exception exists for companies applying to list under the market capitalisation/revenue test. For these companies, the Exchange may accept a shorter trading record period under substantially the same management if the applicant can demonstrate that:
- its directors and management have sufficient and satisfactory experience of at least 3 years in the line of business and industry of the new applicant; and
- management continuity for the most recent audited financial year.
(d) Financial Tests
Main board listing applicants are required to satisfy one of the following 3 tests: the Profit Test; the Market Capitalisation/Revenue Test; or the Market Capitalisation/Revenue/Cash Flow Test.
The Profit Test (Rule 8.05(1))
The applicant or its group (excluding any entities whose results are recorded in the applicant’s financial statements using the equity method of accounting) must have recorded profits of at least HK$20 million in the most recent financial year and aggregate profits of at least HK$30 million in the two years before that. Such profit must exclude any income or loss of the applicant (or its group) generated by activities outside the ordinary and usual course of its business.
Applicants listing under the profits test must also have an expected market capitalisation at the time of listing of at least HK$200 million. This is calculated on the basis of all issued share capital of the applicant including the class of shares to be listed and all other classes of securities that are either unlisted or listed on other regulated markets at the time of listing. The expected issue price of the shares for which listing is sought is used to determine the market value of securities that are unlisted or listed on other markets.
The Market Capitalisation/Revenue/Cash Flow Test (Rule 8.05(2))
If a listing applicant has an expected market capitalisation at the time of listing of at least HK$2 billion at the time of listing, there is no profit requirement. Instead the applicant will meet the financial requirement if it has:
- revenue of at least HK$500 million for the most recent audited financial year; and
- positive cash flow from operating activities carried out by the applicant or its group of at least HK$100 million in aggregate for the three preceding financial years.
The Market Capitalisation/Revenue Test (Rule 8.05(3))
- If an applicant has an expected market capitalisation at listing of at least HK$4 billion, it will meet the financial requirement for listing if it has revenue of at least HK$500 million for the most recent audited financial year.
This test is for larger listing applicants that are able to generate substantial revenue.
Financial Requirement Waivers
The Exchange may also accept a shorter trading record period and/or may vary or waive the financial standards requirements for:
- mineral companies whose directors and management have at least five years’ relevant experience in mining and/or exploration activities;
- newly formed “project” companies (for example a company formed to construct a major infrastructure project); or
- in exceptional circumstances, if the applicant or its group has a trading record of at least two financial years and the Exchange is satisfied that the applicant’s listing is in the interests of the applicant and its investors.
Calculation of revenue:
For both the Market Capitalisation/Revenue Test and the Market Capitalisation/Revenue/Cashflow Test, only revenue arising from the applicant’s principal activities and not items of revenue or gains arising incidentally will be recognised.
Revenue from “book transactions” is disregarded.
(e) Shares in Public Hands (Rule 8.08)
There must be an open market in the securities for which listing is sought. In general, this means that not less than 25% of the listing applicant’s total issued share capital having an expected market capitalisation at the time of listing of at least HK$50 million, must be held by the public (Rule 8.08(1)(a)), i.e. owned by persons who are not “connected persons” of the issuer or persons whose securities have been financed by a connected person or who are accustomed to take instructions from a connected person in relation to their shares (Rule 8.24). “Connected persons” of a PRC issuer include directors, supervisors, chief executives or substantial shareholders (i.e. holders of 10% of the voting power at general meetings) of the PRC issuer or any of its subsidiaries or an associate of any of them (Rule 1.01).
Where a listing applicant has more than one class of securities apart from the H shares, the total securities of the listing applicant held by the public (on all regulated markets including the Hong Kong Stock Exchange) must be at least 25% of the issuer’s total issued share capital. However, the H shares must not be less than 15% of the issuer’s total issued share capital, and have an expected market capitalisation at the time of listing of not less than HK$50 million (Rule 8.08(1)(b)).
Exchange’s Discretion to Accept Lower Public Float (Rule 8.08(1)(d))
For large companies, with an expected market capitalisation in excess of HK$10 billion, the percentage required to be in public hands, may, at the Exchange’s discretion, be lower (but not lower than 15%) provided that:
- the Exchange is satisfied that the number of securities and their distribution will enable the market to operate properly with a lower percentage;
- the issuer makes appropriate disclosure of the lower prescribed percentage of public float in the listing document;
- the issuer confirms the sufficiency of public float in successive annual reports after listing; and
- a sufficient proportion (to be agreed in advance with the Exchange) of any securities to be marketed contemporaneously in and outside Hong Kong, must normally be offered in Hong Kong.
This public float waiver is available only on initial listing. It cannot be applied for post-listing if the issuer subsequently satisfies the HK$10 billion market capitalisation requirement.
(f) Minimum Number of Shareholders at Time of Listing
Securities new to listing must have an adequate spread of shareholders. The number will depend on the size and nature of the issue, but there must be a minimum of 300 holders.
In addition, not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders (Rule 8.08(3)).
After listing, there is no requirement for a minimum number of shareholders. The issuer must however comply with the minimum public float requirement.
(g) Market Capitalisation
The expected market capitalisation at the time of listing of a new applicant must be at least HK$200 million and the expected market capitalisation of the securities held by the public must be at least HK$50 million. If a PRC issuer is listing under the Market Capitalisation/Revenue/Cash Flow Test or Market Capitalisation/Revenue Test it must have an expected market capitalisation at the time of listing of HK$2 billion or HK$4 billion, respectively. Most companies at the time of initial flotation have a market capitalisation of around HK$200 million. Further issues of securities of a class already listed are not subject to this limit, and, in exceptional cases, a lower expected initial market capitalisation may be acceptable, although the Exchange will have to be satisfied as to the marketability of the securities.
Determination of Market Capitalisation at Time of Listing
The expected market capitalisation at the time of listing is calculated on the basis of all issued share capital of the issuer including not only the class to be listed on the Exchange but also any other classes of securities of the issuer that are either unlisted or listed on other regulated markets at the time of listing (Rule 1.01).
The expected issue price of the securities to be listed on the Exchange is used in determining the market value of other classes of securities which are unlisted or listed on other regulated markets (Rule 8.09A). Accordingly, in the case of an H share issuer which also has an A share listing, the expected issue price of the H shares will also be applied to the A shares and any unlisted shares in determining the PRC issuer’s market capitalisation at the time of listing.
(h) Working Capital Sufficiency (Rule 8.21A)
A listing applicant must include a working capital statement in the listing document. In making the statement, the applicant must be satisfied after due and careful enquiry that it and its subsidiary undertakings have sufficient working capital for the group’s present requirements, that is for at least the next 12 months from the date of publication of the listing document. Applicants whose business is wholly or substantially the provision of financial services and whose solvency and capital adequacy are subject to prudential supervision by another regulatory body are not required to comply with this provision. The applicant’s sponsor must provide written confirmation to the Exchange that:
- it has obtained written confirmation from the listing applicant as to the sufficiency of the working capital available to the group for at least 12 months from the date of the listing document; and
- it is satisfied that this confirmation has been given after due and careful enquiry by the applicant and that the persons or institutions providing finance have stated in writing that the financing facilities exist.
(i) Competing Businesses
The Main Board Rules allow competing businesses of an applicant’s directors and controlling shareholders provided that full disclosure is made at the time of listing and, in the case of the directors, on an on-going basis (Rule 8.10). The Exchange may also require the appointment of a sufficient number of INEDs to ensure that the interests of the general body of shareholders are adequately represented.
In the case of a PRC issuer, “controlling shareholder” means any shareholder or other person or group of persons together entitled to exercise, or control the exercise of 30% (or such other amount as may from time to time be specified in applicable PRC law as being the level for triggering a mandatory general offer or for otherwise establishing legal or management control over a business enterprise) or more of the voting power at general meetings of the new applicant or who is in a position to control the composition of a majority of the board of directors of the new applicant. According to Article 217 of the Chinese Company Law, “controlling shareholder” means a shareholder whose shareholding accounts for 50% or more of the total share capital of the new applicant, or a shareholder whose shareholding is less than 50% but whose voting rights pursuant to such shareholding are sufficient to have a major impact on the resolutions of the shareholders’ meeting or shareholders’ assembly. For the purposes of Listing Rule 8.10, the Exchange will normally not consider a PRC Governmental Body (including central, provincial or local level governments but excluding entities under the PRC government that engage in commercial business or operate another commercial entity) as a “controlling shareholder” of a PRC issuer.
(j) Accountants’ Report and Accounting Standards
An issuer must include in its listing document an accountants’ report prepared in accordance with Chapter 4 of the Listing Rules. The accountants’ report must be prepared by professional accountants qualified under the Professional Accountants Ordinance who are independent of the issuer to the same extent as is required of an auditor under the Companies Ordinance and in accordance with the Hong Kong Institute of Certified Public Accountants’ requirements on independence.
The accountants’ report must cover the 3 financial years immediately preceding the listing and the latest financial period reported on must not have ended more than 6 months before the date of the listing document.
The financial history of results and balance sheets included in the accountants’ report of a PRC issuer may be prepared in accordance with Chinese financial reporting standards as an alternative to Hong Kong or International Financial Reporting Standards (Rule 4.11) and to be audited under Chinese accounting standards. The Exchange will also accept a firm of practising accountants which has been approved by China’s Ministry of Commerce and the China Securities Regulatory Commission as being suitable to act as a reporting accountant and auditor for a PRC company listing in Hong Kong.
(k) Directors and Supervisors
The board of directors of a listed company is collectively responsible for the issuer’s management and operations. Directors of listed companies are expected to fulfill fiduciary duties and duties of skill, care and diligence to a standard established by Hong Kong law (Rules 3.08). Each director and supervisor of a PRC company must satisfy the Exchange that he has the character, experience and integrity and is able to demonstrate a standard of competence commensurate with his position as director or supervisor of a listed company (Rules3.09 and 19A.18(2)).
(l) Independent Non-Executive Directors (“INEDs”)
The board of directors is required to include a minimum of 3 INEDs, and INEDs must make up at least one third of the board (Rule 3.10A). One INED must have appropriate professional qualifications or accounting or related financial management expertise (Rule 3.10). The Rules (MB Rule 3.13) contain guidelines for the determination of INED’s independence.
INEDs are required to provide the Exchange with written confirmation of their independence in accordance with those guidelines at the time of submission of their declaration and undertaking. They must also provide annual confirmations of their independence to the listed issuer.
Issuers are required to inform the Exchange and publish an announcement if they fail to comply with the requirements in relation to INEDs. The issuer will have three months to rectify the situation.
Every INED must satisfy the Exchange that he has the character, integrity, independence and experience to fulfill his role effectively. INEDs of PRC issuers must additionally be able to demonstrate an acceptable standard of competence and adequate commercial or professional experience to ensure that the interests of the general body of shareholders will be adequately expressed. In addition, at least one INED of a PRC issuer must be ordinarily resident in Hong Kong (Rule 19A.18(1)).
(m) Audit Committee and Remuneration Committee
The establishment of an audit committee is a compulsory requirement under Rule 3.21. The committee must be made up of non-executive directors only, the majority of which must be INEDs of the listed issuer. The committee must have a minimum of 3 members, at least one of whom must be an INED with appropriate professional qualifications or accounting or related financial management expertise. The committee must be chaired by an INED.
The duties and procedures of the audit committee are Code provisions under Section C.3 of the Corporate Governance Code set out in Appendix 14 to the Main Board Rules.
Listed issuers are also required by Rule 3.25 to establish a remuneration committee which must be chaired by an INED and have INEDs as a majority of its members. The issuer’s board of directors must approve and provide written terms of reference for the remuneration committee which deals clearly with its authority and duties. The terms of reference of the remuneration committee are required to include, as a minimum, the duties specified in Code Provision B.1.2 of the Corporate Governance Code.
If an issuer fails to comply with the requirements in relation to audit and remuneration committees, it must inform the Exchange, publish an announcement giving reasons for such failure and must ensure that it complies with the requirements within three months.
A new applicant seeking a listing of equity securities on the Main Board must appoint one or more sponsors under a written engagement agreement to assist with its listing application (Rule 3A.02). Only firms that are licensed under part V of the Securities and Futures Ordinance for Regulated Activity Type 6 (Advising on Corporate Finance) and are permitted by their licence to conduct sponsor work are allowed to act as sponsors to new listing applicants. At least one sponsor must be independent of the listing applicant. The sponsor must be appointed (and if there is more than one sponsor, the last sponsor to be appointed must be appointed) at least 2 months before the submission of the listing application.
(o) Compliance Adviser
A PRC issuer is required to retain a compliance adviser for the period commencing on the date of listing and ending on the publication of its financial results for the first full financial year after listing (Rule 3A.19). A compliance adviser must be either a corporation licensed or an authorised institution registered to advise on corporate finance matters under the Securities and Futures Ordinance. Only firms who are permitted by their SFC licence or registration to conduct sponsor work are allowed to act as compliance advisers to companies listed on the Main Board or GEM. A compliance adviser must act impartially but is not required to be independent of the issuer. An issuer is not obliged to appoint as its compliance adviser the same firm that acted as the sponsor of its initial public offering.
Issuers are required to consult with, and if necessary, seek advice from their compliance advisers on a timely basis in the following 4 situations:
- before publication of any regulatory announcement, circular or financial report;
- where a notifiable or connected transaction is contemplated;
- where the issuer proposes to use the IPO proceeds differently to the manner detailed in the listing document or where the issuer’s business activities, developments or results deviate from any forecast, estimate or other information in the listing document; and
- where the Exchange makes an inquiry of the issuer under Rule 13.10 regarding unusual movements in the price or trading volume of its securities (Rule 3A.23).
The Exchange may also require an issuer to appoint a compliance adviser at any other time after the first full financial year after listing, for example if the issuer has breached the Listing Rules (Rule 3A.20). In this case the Exchange will specify the period of appointment and the circumstances in which the compliance adviser must be consulted.
A compliance adviser to a PRC issuer is additionally required to inform the issuer on a timely basis of any amendment or supplement to the Listing Rules and any change to Hong Kong’s laws, regulations or codes which apply to the issuer. The compliance adviser is further required to advise the PRC issuer on continuing compliance with the Listing Rules and applicable laws and regulations (Rule 19A.06(3)). Where the PRC issuer’s authorised representatives are expected to be frequently outside Hong Kong, the compliance adviser must act as the issuer’s principal channel of communication with the Exchange (Rule 19A.06(4)).
(p) Mandatory Provisions for Articles of Association
The mandatory provisions which must be incorporated in the issuer’s Articles of Association, (as set out in Appendix 3 and Appendix 13 Part D Section 1) of the Main Board Listing Rules) are designed to provide a sufficient level of shareholder protection. Additional requirements for PRC issuers include, among others, provisions to reflect the different nature of domestic shares and overseas listed foreign shares (including H shares) and the different rights of their respective holders (Rule 19A.01(3)).
(q) Arbitration (Rule 19A.01(3))
Disputes involving holders of H shares arising from the issuer’s articles of association or from any rights or obligations conferred or imposed by the Company Law of the PRC or other relevant PRC laws and regulations must be settled by way of arbitration. The dispute may be heard, at the option of the claimant, at either the China International Economic and Trade Arbitration Commission or the Hong Kong International Arbitration Centre. The arbitral award will be final and binding on the parties to it.
(r) Service Agent (Rule 19A.13(2))
The issuer must appoint, and maintain throughout the period its securities are listed on the Exchange the appointment of, a person authorised to accept service of process and notices on its behalf in Hong Kong. The Exchange must be notified of such appointment, any termination of such appointment, and contact details of the appointee.
If changes in PRC law or market practices materially alter the validity or accuracy of the rules relating to PRC companies, the Exchange may impose additional requirements or make listing of the equity securities of a PRC issuer subject to special conditions, as the Exchange thinks appropriate.
(s) Receiving Agent (Rule 19A.51)
A PRC issuer must appoint a receiving agent in Hong Kong who will receive from the issuer, and hold, pending payment, in trust for H shareholders, dividends declared and other monies owing in respect of H shares.
(t) Share Register
PRC issuers must maintain a register for H shares in Hong Kong (Rule 19A.13(3)(a)). Any rectification of such register will fall under the jurisdiction of the Hong Kong courts.
(u) Management Presence
A new applicant applying for a listing on the Exchange must have sufficient management presence in Hong Kong. This will normally mean that at least two of its executive directors must be ordinarily resident in Hong Kong (Rule 8.12). This requirement applies to Chinese issuers, except as otherwise permitted by the Exchange at its discretion. PRC issuers will generally seek a waiver from the Exchange from this requirement. In considering such waiver application, the Exchange will have regard to, among other considerations, the new applicant’s arrangements for maintaining regular communication with the Exchange, including but not limited to, retaining a compliance adviser and ensuring that its authorised representatives are readily contactable by the Exchange.
(v) Authorised Representatives
Every issuer must appoint 2 authorised representatives to act at all times as the issuer’s principal channel of communication with the Exchange (Rule 3.05). The authorised representatives must be either 2 directors or a director and the company secretary unless the Exchange, in exceptional circumstances, agrees otherwise. The responsibilities of an authorised representative include:
- at all times (particularly prior to commencement of trading in the morning) being the principal channel of communication between the Exchange and the listed issuer and supplying the Exchange with his contact details (including home and office telephone and facsimile numbers);
- to ensure that whenever he is outside Hong Kong suitable alternates are appointed, available and known to the Exchange and to give the Exchange their contact details in writing.
Where a PRC issuer’s authorised representatives are expected to be frequently outside Hong Kong, the Compliance Adviser must act as the issuer’s principal channel of communication with the Exchange.
(w) Company Secretary (Rule 3.28)
A person will be qualified to act as company secretary if by virtue of his/her academic or professional qualifications or relevant experience he/she is, in the opinion of the Exchange, capable of discharging the functions of a company secretary. The academic or professional qualifications which the Exchange considers acceptable are membership of The Hong Kong Institute of Chartered Secretaries and being a Hong Kong solicitor, barrister or certified public accountant.
In assessing a person’s relevant experience, the Exchange will consider the individual’s length of employment with the issuer and other issuers and the roles he has played, the person’s familiarity with the Listing Rules and other relevant Hong Kong laws and regulations, relevant training undertaken and professional qualifications in other jurisdictions.
A company secretary is not required to be resident in Hong Kong.
There must be adequate communication and cooperation agreements in place between the Exchange and the relevant securities regulatory authorities in the PRC. If the PRC issuer has securities listed on another stock exchange, there must also be adequate communication arrangements in place with that stock exchange.
Main Board Application Procedure
At the time of applying to list, an applicant must submit a draft listing document (the Application Proof), the information in which must be “substantially complete” except in relation to information that by its nature can only be finalised and incorporated at a later date (Main Board Rule 9.03(3)).
The Exchange has the power to return a listing application on the grounds that the information in the listing application or the Application Proof is not “substantially complete” (Main Board Rule 2B.01A and 9.03(3)).
If the Exchange returns a listing application to a sponsor before issuing its first comment letter to the sponsor, the initial listing fee will be refunded but in other cases it will be forfeited. If an application is returned, a new application cannot be submitted until 8 weeks after the Return Decision. The names of the applicant and sponsor(s) together with the return date will also be published on the Exchange’s website.
Before submitting the listing application, the sponsor is required to perform all reasonable due diligence on the listing applicant (except in relation to matters that can only be dealt with later). Sponsors also have a duty to report to the Exchange any material information concerning non-compliance with the Listing Rules or other regulatory requirements relevant to the listing. This duty continues after the sponsor ceases to act for a listing applicant if the information came to the knowledge of the sponsor whilst it was acting as the sponsor.
Other documents which are required to be submitted with the listing application include:
- Written confirmation by each director/supervisor that the information in the Application Proof is accurate and complete in all material respects and not misleading or deceptive;
- Confirmation from the reporting accountants that no significant adjustment is expected to be made to their draft reports included in the Application Proof (Guidance Letter HKEx-GL58-13));
- Confirmations from experts that no material change is expected to be made to their reports included in the Application Proof (see Guidance Letter HKEx-GL60-13);
- Draft letter from the sponsor confirming that it is satisfied that the directors’ statement as to sufficiency of working capital has been made by the directors after due and careful enquiry; and
- A certified copy of the applicant’s certificate of incorporation or equivalent.
The Exchange will comment on the Application Proof within 10 business days from receipt of the application.
Assuming only one round of comments and the submission of a response within 5 business days, the Exchange expects a listing application to be able to be heard by the Listing Committee within 25 business days from the submission of the application. If there are 2 rounds of Exchange comments, assuming sponsor takes 5 business days to respond, the listing application can be heard by the Listing Committee within around 40 business days.
If the listing is approved at the Listing Committee hearing, the Exchange will issue a letter requiring the posting of a near-final draft of the listing document (PHIP) on the Exchange’s website. This must be submitted for publication before distribution of the red-herring prospectus to institutional or other professional investors and before book-building commences.
The most important thing is to ensure that the Application Proof which is submitted with the listing application contains all required information to avoid the application being returned by the Exchange. This requirement means that sponsors must complete the vast majority of their due diligence on the listing applicant’s group before submitting the listing application.