The role of regulators in Hong Kong and the PRC

The Institute’s latest China Corporate and Regulatory Update (CCRU) seminar, held in Shenzhen in January this year, demonstrated that regulators in the mainland and Hong Kong are increasingly keen to take up an educational and guidance role in addition to their traditional roles in supervision and enforcement. CSj reviews this year’s CCRU, highlighting the key points raised by the speakers from the China Securities Regulatory Commission and the Hong Kong, Shanghai and Shenzhen stock exchanges.

Good policework alone will not achieve a high-quality market for investors – that was one of the key messages to emerge from the Institute’s annual China Corporate and Regulatory Update (CCRU) seminar, which was held in Shenzhen in January this year. The speakers from the China Securities Regulatory Commission and the Hong Kong, Shanghai and Shenzhen stock exchanges, focused on their latest initiatives to give practical guidance on regulatory compliance in the increasingly interdependent markets of mainland China and Hong Kong. They also highlighted their latest supervisory and enforcement initiatives, however, demonstrating that effective regulation requires the use of both carrot and stick approaches.

CSj takes you on an armchair tour of the event, highlighting the main points raised during the seminar.

HKEx – developments and practical issues in the regulation of listed companies in Hong Kong Hong

Kong Exchanges and Clearing Ltd (HKEx) focused its CCRU presentation on three areas:

  1. the recent changes to Hong Kong’s Corporate Governance Code and related listing rules
  2. corporate governance and internal control issues, and
  3. practical issues relating to the disclosure of financial information in companies’ financial reports.

1. Amendments to the Code and related listing rules

HKEx emphasised in its CCRU presentation that its recent Code and listing rule changes will help create a level playing field for all listed companies, irrespective of whether they are domiciled in the mainland or Hong Kong. Changes which will have a very direct impact on the board secretaries of H-share listed companies, for example, include:

  • the removal of the requirement for a company secretary to be ordinarily resident in Hong Kong
  • the repeal of listing rule 19A.16 to make the requirements for board secretaries of mainland listed companies the same as for other listed companies, and
  • the new listing rule 3.29 requiring company secretaries of listed companies to undertake 15 hours’ professional training in a financial year.
  1. Corporate governance and internal controls

In the mainland, the ‘hands on’ approach of regulators is nowhere more apparent than in the very detailed guidance that has been given on establishing effective internal controls. This has also been a focus in Hong Kong, however, and HKEx reminded the audience that listed companies are required to have an appropriate organisational and management structure, and effective internal controls to protect the companies’ assets.

An effective system of internal controls needs to guard against very varied risks, for example risks relating to compliance, price-sensitive information disclosure, staff/ management ethics, etc. Since these risks are subject to constant change, Hong Kong’s Corporate Governance Code includes principle C.2 which recommends that directors should at least annually conduct a review of the effectiveness of the system of internal control of their company and its subsidiaries and report to shareholders that they have done so in their Corporate Governance Report.

  1. Financial disclosure in Hong Kong

HKEx recently reviewed the financial reports of Hong Kong listed companies – including annual, quarterly and interim reports – to:

  • assess disclosure compliance with the listing rules, the Companies Ordinance and accounting standards (HKFRS, IFRS, CASBE, etc)
  • identify any disclosure problems, and
  • identify possible improvements in transparency.

The review was risk-based and carried out on a random sample basis. HKEx emphasised that a particularly important area of financial disclosure in Hong Kong is that of connected transactions. HKEx reminded attendees that the listing rules, in particular listing rule 14A.38 of the main board rules, set out clear requirements for listed companies engaged in connected transactions. The rules are intended to ensure that the interests of shareholders as a whole are taken into account when listed companies are involved in connected transactions. The rules also provide certain safeguards against listed issuers’ directors, chief executives or substantial shareholders (or their associates) taking advantage of their positions.

HKEx also reminded attendees that auditor’s confirmation is required in the annual report to confirm matters related to continuing connected transactions. All connected transactions also need the approval of the board and should be in compliance with the issuer’s pricing policies.

CSRC – a regulatory update on M&A activity in the PRC

The China Securities Regulatory Commission (CSRC) focused its presentation on merger and acquisition (M&A) activity in the mainland which has been subject to explosive growth in recent years. Turnover in both the global and China M&A market has increased rapidly since 2002. There has in fact been a 50% rise in M&A turnover over the past three years. The cumulative turnover was RMB1,293.3 billion between 2006 and 2011. The average value of acquisitions of listed companies amounted to RMB4.297 billion, compared to RMB417 million per case in 2006, which represents an increase of 10.3 times. The CSRC therefore believes that the M&A market in China has tremendous growth potential.

The CSRC sees its role as being not only to supervise M&A activity in mainland China, but also to assist in its development. It pointed out that, since August 2009, the Commission has made a number of regulatory improvements, such as improving the mandatory disclosure of information regarding M&A activity, as well as improvements designed to support the industry. The Commission listed 10 goals of the CSRC in regulating M&A activity in mainland China, namely to:

  1. strengthen the capital market to support M&As
  2. support innovative M&As for listed companies
  3. assist restructured companies to be listed as a whole – this is to resolve the issues of competition within the industry and problems of related-party transactions
  4. regulate backdoor listing activities
  5. improve relevant rules and policies for the development of a market-oriented pricing mechanism
  6. promote the establishment of an integrated system to prevent and control insider dealing and to ensure a level playing field for M&A activity
  7. improve the system for the resumption of trading and disclosure of information and monitoring of unusual stock price fluctuations
  8. define the function and responsibilities of intermediaries in M&As and improve their efficiency and quality
  9. regulate and improve the review and approval process of M&As, and
  10. optimise the external environment for the M&A of listed companies.

SSE – developments in the governance of listed companies in Shanghai

The Shanghai Stock Exchange (SSE) launched its presentation with a quick profile update of the Shanghai securities market.

Rise in net profits.

Total income for listed companies in Shanghai for the first half of 2011 was RMB8,255.2 billion, a 26.4% rise over the same period last year. The SSE50 Index achieved a total revenue of RMB5,023.2 billion and the net profit attributable to shareholders was RMB624.1 billion, which accounted for 60.9% and 73.1% of all the listed company’s total revenue and net profit attributable to shareholders. The performance of most sectors grew during the first half of 2011. The finance, insurance, and extractive industries had the highest growth; their net profits accounted for 58.8% and 15.7% of the net profit of all listed companies.

Growth in net assets.

Net assets for all listed companies in Shanghai for the end of the second half of 2011 was approximately RMB9,978.6 billion, a 22.8% rise over last year; and a rise of 11.9% per share over last year.

Decline in net cash flow from operations.

Net cash flow for all listed companies in Shanghai during the first half of 2011 was RMB1,009.3 billion, 38.9% down over last year; cash flow per share declined 44.3% compared to the same period a year ago. Net cash flow from operations of more than half of the listed companies declined over the same period a year ago. Companies which saw the steepest decline were in the sectors of banking, securities, oil and petrochemical, manufacturing and other industries.

Profit contributions are more concentrated.

The net profit attributable to shareholders of the top 10 companies in Shanghai during the first half of 2011 was RMB523.6 billion, which accounted for 61.3% of all Shanghai listed companies.

The SSE also revealed that it is has stepped up its supervision of the following sectors:

  • external guarantee and trust financing of listed companies
  • entrusted loans
  • the dividend policies of listed companies (though it stressed that there is no mandatory requirement for companies to issue dividends), and
  • related-party transactions (the SSE referred attendees to its guidance on the implementation of relatedparty transactions).

SZSE – operational guidelines for listed companies in Shenzhen

The Shenzhen Stock Exchange (SZSE) took the opportunity of its CCRU presentation to highlight its recent operational guidelines for listed companies. The guidelines are designed to give practical help to companies listed on the SZSE on a range of corporate governance and compliance issues. In addition, the SZSE has issued FAQs on common operational problems and the legal liabilities of listed companies.

  1. Operational guidelines for listed companies

The aims of the guidelines are to:

  • promote sound corporate governance structure, and improve internal control and risk prevention
  • protect the legitimate rights and interests of minority shareholders
  • provide guidance and strengthen the code of conduct for directors, supervisors and senior management • strengthen supervision of the insiders’ transactions to curb insider dealing
  • strengthen the code of conduct for controlling shareholders, and
  • protect the rights of investors and encourage the implementation of social responsibility.
  1. FAQs on common operational problems and legal liabilities

The SZSE pointed out in its CCRU presentation that compliance with the relevant requirements relating to external financial assistance is a particularly important area for companies listed on the SZSE. The SZSE’s new FAQs therefore emphasise the need for listed companies to ensure effective supervision of this area and prevent the improper seizure of company funds. The FAQs outline the requirements for providing details on the management of the company’s fund-raising policies; improving the supervision of intermediaries; the obligations of supervisors and improvements to the disclosure of raised funds.

The FAQs also provide detailed guidelines on the following areas:

  • the respective responsibilities of the board of shareholders, the board of directors and the board of supervisors
  • the statutory requirements on the ratio of independent directors and the qualifications of independent director candidates the responsibilities and obligations of senior management, a conduct code for the chairman and independent directors and the need for the company to monitor the stock transactions of key personnel
  • the protection of the rights and interests of minority shareholders and codes of conduct for matters such as internet voting, equality of all shareholders and improvements to the management of investor relations, and
  • codes of conduct for controlling shareholders and actual controllers, and equity changes of listed Reporting by Stephanie Chin, Journalist companies, major shareholders, and actual controllers etc. Regarding the legal liabilities of listed companies, the FAQs set out companies’ accountability for violations of statutory requirements. They set out the civil and criminal liabilities for matters such as fraud in issuing stocks and bonds; false statements; misappropriation of the listed company’s assets; insider dealing; and the manipulation of the securities and futures markets.

Reporting by Stephanie Chin



This year’s China Corporate and Regulatory Update seminar, which drew 43 attendees, was held on 11 January 2012 at the Pavilion Hotel, Shenzhen, China. Its sister event, the Annual Corporate and Regulatory Update (ACRU) seminar, will be held in Hong Kong on 23 May 2012.

The recent changes to Hong Kong’s Corporate Governance Code and related listing rules are covered on pages 12–17 of this month’s journal.