Doing business in China and the Hong Kong SAR: Key issues for Russian companies to consider
February 2015
China’s Capital Markets
China’s Capital Markets
l Mainland China’s stock markets
l Shanghai Stock Exchange – world’s 5th largest by market cap in 2014
l Shenzhen Stock Exchange – world’s 9th largest by market cap in 2014
l Shanghai & Shenzhen exchanges are domestic exchanges only
– do not allow listing of foreign companies
– restrict direct investment by foreign investors
– limited degree of foreign investment allowed under the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Institutional Investor (RQFII) programmes
Hong Kong Stock Exchange (HKEx)
l International exchange
– full access for international investors
– allows listing of foreign companies which meet its requirements
l Strategic position as gateway between Mainland China and rest of the world
l International listing venue of choice for Mainland China companies
l 876 Mainland Chinese companies listed on HKEx account for 60% of total market capitalisation (as at 31 Dec 2014)
l HKEx provides Mainland Chinese companies with access to international capital and offers international investors opportunity to invest directly in Mainland Chinese companies and participate in China growth story
l Increasing number of overseas companies listing on HKEx in recent years
Why List in Hong Kong?
l No. 1 International Financial Centre in Asia
l Access to Mainland Chinese investors currently through Qualified Domestic Institutional Investor programme
l Shanghai-Hong Kong Stock Connect launched in November 2014 allows Mainland Chinese investors to invest directly in HK listed stocks for the 1st time. Programme helps broaden investor base and add liquidity to HK market adding momentum to the market
Shanghai – Hong Kong Stock Connect
l Northbound/ Southbound Share Trading
Eligible Shares
Eligible shares for Northbound Trading Link
l SSE 180 Index
l SSE 380 Index
l Shares of companies with A-shares and H-shares listed on the SSE
Eligible shares for Southbound Trading Link
l Hang Seng Composite LargeCap Index
l Hang Seng Composite MidCap Index
l Shares of companies listed on the HKEx and SSE
Quotas on a “Net Buy” Basis
/ Aggregate Quota / Daily Quota /Northbound Trade / RMB 300 billion / RMB 13 billion
Southbound Trade / RMB 250 billion / RMB 10.5 billion
“Net buy” basis: Investors may sell cross-boundary securities regardless of quota balance
Eligible Investors
Mainland investors who may participate in southbound trading link must be:
l institutional investor; or
l individual investors with at least RMB500,000 in securities and cash
Rules and Regulations
l Trading and clearing arrangements are subject to rules and regulations of the market where trading and clearing take place
l Listed companies only subject to rules and regulations of markets where they are listed
l Pilot programme will operate on days that are trading days in both SSE and HKEx
l ChinaClear and HKSCC will establish direct link for cross-border clearing (each will become a clearing participant of the other)
Regulatory and Enforcement Cooperation
l CSRC and SFC will cooperate on:
– referral and information exchange mechanisms concerning improper activities;
– investigatory cooperation in relation to cross-border illegal activities including disclosure of false or misleading information, insider dealing and market manipulation;
– bilateral enforcement exchange and training; and
– enhancement of general standards of cross-border enforcement cooperation
Benefits of HK listing
l Deep primary and secondary market liquidity
– 115 new listings* in 2014 raised US$ 29.4 billion (up 33% from 2013)
* excludes transfers from the Main Board to GEM
– Equity fund raised by listed cos post-IPO in 2014 = US$91.3 billion
l Access to local and international funds – Hong Kong is Asia’s leading fund management centre with largest concentration of international fund managers
l Number of companies listed on HKEx at end Dec 2013 = 1,752
– 1,548 on the Main Board and
– 204 on the Growth Enterprise Market (GEM)
l Established legal system based on English common law + regulatory framework = investor confidence
l Numerous tax advantages, currency convertibility, free transferability of securities and no restrictions on capital flow
l Opportunities for overseas cos to raise profile and visibility in China and Asia-Pacific region
l Branding opportunities for companies in the luxury goods sector – attracted listings of high profile companies such as Prada, Coach, Inc., L’Occitane and Samsonite
l China’s position as a major consumer of energy, minerals & metals has attracted mining & natural resource companies
– e.g. Swiss commodities giant Glencore International AG, Russia-based United Company Rusal PLC, Kazakhstan copper miner Kazakhmys PLC and Brazilian metals and mining company Vale S.A.
l Vale S.A = 1st overseas company to list on HKEx in form of Hong Kong Depositary Receipts (HDRs). HDR listings allowed on Main Board (but not GEM)
Overseas listings
Issuer / Country of Operations/Headquarters / Country of Incorporation / Sector / Year of Listing / Funds Raised(HK$ billion) /
Glencore International plc / Headquartered in Switzerland / Jersey / Natural Resources / May 2011 / 77.75
RUSAL / Russia / Jersey / Natural Resources / January 2010 / 17.39
Mongolian Mining Corporation / Mongolia / Cayman Islands / Natural Resources / October 2010 / 5.81
PRADA SpA / Italy / Italy / Luxury / June 2011 / 19.23
Samsonite International SA / Headquartered in United States / Luxembourg / Luxury Goods / June 2011 / 10.09
L’Occitane / France / Luxembourg / Luxury Goods / May 2010 / 5.5
SECONDARY LISTINGS BY WAY OF INTRODUCTION
Vale SA
(HDR Listing) / Brazil / Brazil / Natural Resources / December 2010
Kazakhyms PLC / Kazakhstan / United Kingdom / Natural Resources / June 2011
Coach, Inc
(HDR Listing) / United States / United States / Luxury Goods / December 2011
Hong Kong’s markets
l Main Board – caters for established companies able to meet its profit or other financial standards
l Growth Enterprise Market (“GEM”) – caters for smaller growth companies, has lower admission criteria and acts as a stepping stone to the Main Board
– 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)
Eligibility of Overseas Listing Applicants
l Listing Rules provide for listing of companies incorporated in Hong Kong, the PRC, the Cayman Islands and Bermuda (Recognised Jurisdictions)
l Exchange has also accepted companies from 21 other jurisdictions (Acceptable Jurisdictions) for listing:
Australia, Brazil, the British Virgin Islands, Canada (Alberta), Canada (British Columbia), Canada (Ontario), Cyprus, France, Germany, Guernsey, the Isle of Man, Italy, Japan, Jersey, the Republic of Korea, Labuan, Luxembourg, Singapore, the United Kingdom and the states of California and Delaware in the United States of America
l Exchange/SFC Joint Policy Statement Regarding the Listing of Overseas Companies sets out criteria for acceptance of overseas listing applicants
l Key requirements relate to:
– shareholder protection standards and
– regulatory co-operation arrangements between statutory securities regulator(s) in the applicant’s jurisdiction of incorporation and its place of central management and control (if different) and the Hong Kong’s Securities and Futures Commission (“SFC”)
l Exchange requires listing applicant to demonstrate that the laws and regulations of its country of incorporation, and the provisions of its constitutional documents, together provide standards of shareholder protection which are equivalent to those provided under Hong Kong law
l Key shareholder protection standards relate to:
– matters which require approval by a super-majority of shareholders’ votes (e.g. material changes to the company’s constitutive documents or voluntary winding-up of the company);
– a requirement that any change to the company’s constitutional documents to increase an existing shareholder’s liability to the company must be agreed by the shareholder in writing;
– the appointment, removal and remuneration of auditors must be approved by a majority of shareholders or another body that is independent of the board; and
– proceedings at general meetings
l Applicants incorporated in Acceptable Jurisdictions – can refer to Exchange’s Country Guide for that jurisdiction. If adopt arrangements set out in the Country Guide – no need to provide detailed explanation of how it meets shareholder protection standards
l Applicants incorporated in a jurisdiction new to listing must demonstrate how the laws and regulations of their country of incorporation, their constitutional documents and the arrangements they adopt as a whole meet the key shareholder protection standards set out in the Joint Policy Statement
Regulatory Cooperation Arrangements
l statutory securities regulator in listing applicant’s (a) jurisdiction of incorporation and (b) place of central management and control (if different) must:
– be a full signatory of the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (the “IOSCO MMOU”); or
– have entered an appropriate bi-lateral agreement with the SFC providing adequate arrangements with the SFC for mutual assistance and exchange of information for enforcing and securing compliance with the laws and regulations of that jurisdiction and Hong Kong
Russia as an Acceptable Jurisdiction of incorporation
l Russia - signed the IOSCO MMoU on 16 February 2015.
l The MMoU paves its way to becoming an Acceptable Jurisdiction for the purpose of listing in Hong Kong
l The previous absence of such an MMoU was the reason why Lukoil, Russia’s second largest oil producer, suspended preparations to list in Hong Kong in 2013
l Before Russia singed the IOSCO MMoU, Russian company incorporated in an Acceptable Jurisdiction would not be able to list if its place of central management and control is Russia
l Restructuring a Russian company under a listing vehicle incorporated in a Recognised Jurisdiction risked being consider unacceptable if viewed as deliberate attempt to avoid the requirements of the Joint Policy Statement
l 2 Russian-based companies are currently listed in Hong Kong: Rusal and IRC Limited - neither is incorporated in Russia
l Rusal – incorporated in Jersey and listed before requirement for regulatory cooperation arrangements with statutory securities regulator in listing applicant’s place of central management and control
l IRC Limited – incorporated in Hong Kong (1 of the 4 Recognised Jurisdictions which do not require there to be regulatory cooperation arrangements in place with the jurisdiction of central management and control)
Mining and Natural Resource Companies
l New Listing Rules for Mineral and Petroleum companies introduced in 2010
l Advantage of listing as a Mineral Company on the Main Board is the opportunity to obtain a waiver from the requirement to meet the financial tests
l Mineral Company definition - new listing applicants whose Major Activities (whether directly or through a subsidiary) include exploration for, and/or extraction of, natural resources such as minerals or petroleum. Major Activity is one representing 25% or more of the total assets, gross revenue or operating expenses of the applicant and its subsidiaries
l Other requirements for Mineral Company listing applicants:
– Must have at least discovered a portfolio of Indicated Resources (for minerals) or Contingent Resources (for petroleum) under applicable reporting standards “of sufficient substance” to justify a listing. Early stage exploration companies are not acceptable for listing
– Must have rights to actively participate in exploration and/or extraction through either (i) an interest of >50% of assets (by value) or (ii) rights acceptable to HKEx giving it sufficient influence in decisions (e.g. under joint ventures, production sharing contracts or specific government mandates) (MB Rule 18.03 (1) / GEM Rule 18A.03 (1)). HKEx normally expects an interest of >30% in relevant assets. Companies with interest of <30% may be considered, e.g. if they actively operate mining project
Requirement for Competent Person’s Report
l A new applicant’s listing document must include a Competent Person’s Report on its reserves and resources
l A Competent Person must:
– have > 5 years’ experience relevant to the type of mineral/petroleum assets and to the mining activity undertaken by the listing applicant;
– be professionally qualified and a member of a recognised professional organisation in a jurisdiction whose statutory securities regulator has regulatory cooperation arrangements with HK ; and
– be independent of the listing applicant and its directors
l Effective Date of a Competent Person’s Report must be less than 6 months before date of listing document
l Competent Person’s Report (CPR) must be prepared in accordance with the JORC Code, NI 43-101 or the SAMREC Code (for mineral reserves and resources) or PRMS (for petroleum reserves and resources)
l If information is presented in accordance with other reporting standards (e.g. Chinese or Russian), reconciliation to the accepted reporting standards is required
Qualifications for MB listing
(a) Suitability for listing
– Must satisfy Exchange that applicant and its business are suitable for listing
(b) Operating History and Management
– A Main Board applicant must have a trading record period of, and management continuity for, at least 3 financial years and ownership continuity and control for at least the most recent audited financial year
Exception
l Under the market capitalisation/ revenue test, the Exchange may accept a shorter trading record period under substantially the same management if the new 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
(c) Financial Tests – Applicants must meet one of the three financial tests:
1. Profit test
2. Market cap/revenue test
3. Market Cap/Revenue/Cashflow test
l For both Tests 2&3, only revenue from principal activities (not revenue from incidental activities) will be recognised. Revenue from “book transactions” is disregarded
Financial Requirement Waivers for Mineral Companies