Press Release

LCQ1: Regulation of disclosure of information

Wednesday, February 7, 2001

Following is a question by the Hon Martin Lee and a reply by the Secretary for Financial Services, Mr Stephen Ip, in the Legislative Council today (February 7):

Question:

Regarding the regulation of disclosure of information by listed companies, will the Government inform this Council:

(a) of the heads of listed companies who, over the past year, contravened the Rules Governing the Listing of Securities ("Rules") by disclosing to outsiders company information which should, in accordance with the Rules, be kept confidential before formal announcement, or by not making an announcement as soon as possible when the security of such information has been breached;

(b) whether the relevant authorities received complaints about such contraventions over the past year; if so, of the details of, and the actions taken to investigate and follow up such complaints; and

(c) whether it will enact legislation or give statutory status to the Rules, to stipulate that heads of listed companies should release in an equitable manner information, which is expected to have great influence on the prices of the securities of their companies?

Reply :

Madam President,

(a) According to paragraph 2 of the Listing Agreement of the Rules Governing the Listing of Securities (Listing Rules) published by the Stock Exchange of Hong Kong Limited (Exchange), the issuer (i.e. the listed company) shall keep the Exchange, members of the listed company and other holders of its listed securities informed as soon as reasonably practicable of any information relating to the group (including information on any major new developments in the group's sphere of activity which is not public knowledge) which:

(i) is necessary to enable them and the public to appraise the position of the group;

(ii) is necessary to avoid the establishment of a false market in its securities; and

(iii) might be reasonably expected materially to affect market activity in and the price of its securities.

Note 2.1 of the Listing Agreement further specifies that information should not be divulged outside the listed company and its advisers in such a way as to place in a privileged dealing position any person or class or category of persons. Furthermore, Note 2.2 stipulates that it is the direct responsibility of the directors of the listed company to ensure that information which is likely to have a significant effect on the price of its securities is kept strictly confidential until a formal announcement is made.

It is the responsibility of the directors of a listed company to ensure that their company complies with the Listing Rules. The Exchange may, under paragraph 39 of the Listing Agreement, require the company to issue promptly an announcement clarifying the relevant information (for example, whether media reports on the relevant company are true). Having regard to the circumstances, the Exchange usually requires the listed company to make best endeavours to issue such "clarification announcements" before commencement of trading. If the listed company cannot issue an announcement in time as circumstances do not allow, it should make a request to the Exchange for suspension of trading of the securities. The Exchange may also take the initiative to suspend trading of the securities as circumstances warrant. In respect of a breach of the Listing Rules, the Exchange may publicly censure the listed company and its directors, suspend trading of its securities or in serious cases, delist its securities.

Over the past year, the Exchange publicly censured the following companies and individuals for breaching the information disclosure requirements under the Listing Agreement:

(1) Wonson International Holdings Limited - the Exchange censured the company and its relevant directors for failing to inform the Exchange and its shareholders as soon as reasonably practicable after there was a change in the use of proceeds as originally set out in its prospectus. The company was in breach of paragraph 2 of the Listing Agreement. The directors of the company also failed to use their best endeavours to ensure that the company would comply with the Listing Rules, hence censured by the Exchange for breach of their Declarations and Undertakings with regard to Directors (Directors' Undertakings) given by them to the Exchange;

(2) Benefun International Holdings Limited - the breach related to a proposed share placement by the company by way of subscription agreement under which the subscribers and the subscription price had been determined. The company and its relevant executive directors failed to make appropriate reference to the transaction in either of its "clarification announcements" subsequently made pursuant to paragraph 39 of the Listing Agreement. In such announcements, the company and its executive directors denied that they were aware of any matter which could explain the fluctuations in the company's share price and volume. Therefore, the information misled the Exchange, the shareholders of the company and the investing public. The company and its relevant executive directors were censured by the Exchange for breaches of paragraphs 2 and 39 of the Listing Agreement, and the relevant Directors' Undertaking.

(b) Over the past year, the Exchange did not receive any complaint about contravention of the above requirements. However, to enforce the disclosure requirements under the Listing Rules, the Exchange has dedicated a team of staff to monitor, on a daily basis, market activities and media reports on listed companies. As a result of these monitoring efforts, the Exchange may discover instances of possible selective disclosure, and seek explanation or clarification from the listed companies as necessary.

Last year, the Exchange made about 7,800 enquiries from listed companies on unusual movements in share price or turnover. Such movements arose from many factors and in many cases were not instances of possible selective disclosure. As a result of the Exchange's enquiries, listed companies made about 3,000 clarification announcements. In addition, about 1,100 announcements were made by listed companies pursuant to paragraph 2 of the Listing Agreement. These announcements ensure that investors have access to timely information on listed companies and help forestall unfounded speculation.

(c) To ensure fair operation of the market, it is most important to maintain transparency so that investors can have timely access to information which is likely to have a significant effect on the prices of securities. It is clearly stipulated in the existing Listing Rules that listed companies should disclose information that is expected materially to affect the price of their securities in an equitable manner to ensure market transparency.

On the question of whether the Listing Rules should be provided with statutory backing, we consider that the Listing Rules have worked well and are able to meet the needs of market development. Therefore, we have no intention at this stage to change the status of the Listing Rules, but will keep under review the enforcement of the Listing Rules in collaboration with the Securities and Futures Commission (SFC) and the Exchange, to see if there are areas for further improvement.

We have consulted the public on the enforcement of the Listing Rules. Comments received are that flexibility should be maintained in respect of the contents and interpretation of the Listing Rules, so as to facilitate market development and innovation. In addition, the Listing Rules represent the consensus of market participants in respect of standards of commercial conduct and behaviour acceptable to them. The Listing Rules should be reviewed and revised from time to time to keep pace with market developments.

If the Listing Rules were provided with statutory backing, they would be subject to the normal rules of legislative interpretation and procedures for amendments, and would lose flexibility. As the existing Listing Rules are enforced by the Exchange, they allow cases to be dealt with more expeditiously than by legal proceedings.

The Exchange and the SFC are conducting a comprehensive review of the Listing Rules, including requirements relating to disclosure of financial information, streamlining of disciplinary procedures and ways to enhance sanctions. This will enable the Exchange to enforce the Listing Rules in a more efficient and effective manner. The SFC will also continue to conduct regular audits on the Exchange's efforts in enforcing the Listing Rules, and make recommendations for improvement to better meet the needs of the market as necessary.