Download LCQ6: Regulating the listing of Mainland enterprises in Hong Kong (26

Press release
LCQ6: Regulating the listing of Mainland enterprises in Hong Kong
(26.10.2005)
Wednesday, October 26, 2005
Following is a question by the Hon Wong Ting-kwong and a written reply by
the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the
Legislative Council today (October 26):
Question:
It has been reported that although the number of Mainland enterprises listed in
Hong Kong is growing, their main businesses are carried out in the Mainland, and
their management and the largest portion of their assets are located outside Hong
Kong. Furthermore, since China is not yet a signatory to the Multilateral
Memorandum of Understanding of the International Organization of Securities
Commission, the local monitoring authorities have difficulties in finding evidence
when such companies are suspected of malpractices. Hence the regulatory work of
the Securities and Futures Commission and the Stock Exchange of Hong Kong are
adversely affected. Even if the local monitoring authorities have obtained relevant
evidence, law enforcement officers in the Mainland are often reluctant to come to
Hong Kong to give evidence. Moreover, there is no extradition law between the
Mainland and Hong Kong to provide for the extradition of suspects to stand trials in
Hong Kong. In this connection, will the Government inform this Council:
(a) how the authorities address such problems as finding evidence, securing
witnesses to come to Hong Kong to give evidence and extraditing suspects in the
process of combating the malpractices of the above companies in order to safeguard
the interests of Hong Kong investors and to maintain Hong Kong's reputation as an
international financial centre; and
(b) given that the local monitoring authorities have proposed to strengthen the
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regulation on sponsors by requiring them to take up the same responsibilities as the
management of listed companies in relation to the contents of the prospectus so as to
reduce the risks to Hong Kong shares caused by the listing of poorly managed
Mainland enterprises, whether the authorities have assessed the feasibility of the
proposal and if it will be supported by the industry; if they have, of the assessment
results?
Reply:
Madam President,
(a) The regulatory structure of the securities and futures industry is enshrined in the
Securities and Futures Ordinance (SFO) (Cap. 571). Under this regulatory structure,
the Securities and Futures Commission (SFC) is an independent statutory regulator
responsible for, inter alia, maintaining and promoting the orderliness of the
securities and futures industry, providing protection for members of the investing
public and for minimizing crime and misconduct in the industry. To enable SFC to
discharge its statutory duties effectively, it has been vested with a wide range of
investigative powers such as obtaining documents and explanations from listed
companies and parties closely connected with them, and disciplinary powers in
respect of its licensees, including sponsors.
SFC's reply to part (a) of Member's question is appended below "SFC has maintained an excellent working relationship with the China
Securities Regulatory Commission (CSRC), who has been rendering assistance to
SFC to the extent that it can. SFC has entered into a Memorandum of
Understanding with CSRC, which provides for exchange of non-public information.
"SFC has to rely on voluntary co-operation from witnesses, suspects, and
companies in the Mainland. CSRC has assisted SFC in conducting interviews in
the Mainland. SFC will continue to discuss with CSRC to further strengthen
co-operation. However, where local government agencies are involved,
co-operation from CSRC alone is not enough.
"On the domestic front, SFC maintains regular communication and good
cooperation with local enforcement agencies such as the Police and the Independent
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Commission Against Corruption, and such cooperation facilitates information
sharing among the authorities and co-ordinated investigations on corporate crimes
including cross-boundary cases. SFC will also continue to work closely with the
Hong Kong Exchanges and Clearing Limited, the frontline regulator, to strengthen
listing regulation and raise the standards of intermediaries like sponsors."
(b) Sponsors are regulated by SFC under the licensing regime enshrined in
SFO. Under the SFO, sponsors are required to obtain a licence to carry out Type 6
regulated activity, i.e. advising on corporate finance. The regulatory regime
enshrined in SFO empowers SFC to set standards, investigate into misconduct and
impose disciplinary sanctions on sponsors.
SFC's reply to part (b) of Member's question is appended below "Sponsors play an important role in assessing a company's suitability for listing
and bringing such company to market. Under the Listing Rules promulgated by the
Stock Exchange of Hong Kong, a sponsor must be closely involved in the
preparation of the prospectus and conduct reasonable due diligence inquiries to
satisfy itself as to the disclosures in the document. In view of the critical
assessment required to be done by sponsors on the accuracy and completeness of the
information given by the company and its directors, and their significant economic
interest in the success of an offer, there is justification for imposing liability on
sponsors for untrue statements/material omissions in a prospectus in the same
manner as directors of the company are so liable.
"In line with those jurisdictions which specifically impose liability on the
underwriters of an offering (including Australia, Singapore and the US), a due
diligence standard is proposed to be built into the existing statutory framework in
order for defendants to discharge the "reasonable belief" defence in legal
proceedings for untrue prospectus disclosures/material omissions.
"The proposal for extending civil and criminal liability for misstatements in
prospectuses to sponsors is one of the subjects discussed in the Consultation Paper
on Possible Reforms to the Prospectus Regime. The consultation will end on 30
November 2005. As no formal submissions on the above proposal have been
received to date, we are not currently in a position to assess the level of support by
the industry."
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