Consultation on the Hong Kong Listing Rules relating to PRC issuers
02 March 2023
02 March 2023
The Hong Kong Stock Exchange published a consultation paper towards the end of February 2023, proposing a number of changes to the Hong Kong Listing Rules affecting PRC issuers.
The changes are triggered by the implementation of new PRC regulations on overseas listings and the repeal of certain PRC regulations (i.e. the Mandatory Provisions and the Regulations, both as defined under the Listing Rules). These changes take effect on 31 March 2023.
Under the new PRC regulations, holders of domestic shares and H shares are no longer deemed as different classes of shareholders. The new PRC regulations also introduce a new filing regime for all overseas listings and securities offerings by PRC companies. PRC companies will be required to register their overseas listings and securities offerings by filing materials relating to key compliance issues with the CSRC (and this will replace the existing CSRC approval system for overseas listings).
Changes to the Listing Rules are divided into three areas.
Set out below is a summary of the proposed changes for items (1) and (2) above.
Certain provisions in the Listing Rules will need to be revised to reflect the upcoming changes to the PRC regulatory framework. No market consultation will take place as the changes below are purely consequential changes.
The consequential changes involve:
The consequential amendments will become effective on a date to be announced, subject to the necessary regulatory approvals.
Existing PRC issuers are advised to consult with their PRC legal advisors on whether their articles need to be amended to comply with the new PRC regulations. PRC issuers listed in Hong Kong need to comply with the Listing Rules and their articles. This means that, until their articles are amended, PRC issuers will still need to comply with their existing articles (which reflect the Mandatory Provisions, such as class meetings).
New listing applicants incorporated in the PRC are expected to follow the new PRC regulations when preparing their articles. The Exchange will allow these applicants to comply with the Listing Rules during the period between the repeal of the Mandatory Provisions and the effective date of the Listing Rule changes.
The Exchange also proposed other changes to the Listing Rules in light of changes to PRC laws and the development of the financial market in Mainland China. The proposals generally relate to the two areas set out below.
Mandate limits on share issuances
As domestic shares and H shares are no longer deemed to be different classes of shares, the Exchange proposes to amend Listing Rule 19A.39 so that the general mandate and the scheme mandate would be subject to an overall cap of 20% and 10% respectively of a PRC issuer’s total issued shares (i.e. there will be no separate mandate limits for the domestic and H shares).
The removal of the separate mandate limits means that a PRC issuer will have more flexibility within the overall cap to decide how many H shares it may wish to issue.
However, as A shares and H shares are traded on separate exchanges and are not fungible, if the proposal is adopted, there is a chance that the H share public float would drop to a low level (as a percentage of the total issued shares) if a PRC issuer chooses to issue only new A shares after listing. This may reduce the relative liquidity and investors’ interest in the H share market (relative to the A share market).
Limits on issue price
In relation to the issue of new shares under the general mandate and the exercise price for share options, the Exchange proposes to retain the current Listing Rules provisions benchmarking the issue / exercise price to the market price of the H shares. The purpose of the share price limit is to limit the dilution impact to shareholders from a share issuance.
The Exchange will consider, on a case by case basis, a request for the issue of A shares under a general mandate to be benchmarked to the market price of the A shares.
Rules with specific requirements for H shares
The Exchange proposes to retain certain provisions in the Listing Rules governing the trading of H shares (as A and H shares are not fungible), such as:
The current Chapter 19A of the Listing Rules includes provisions which only apply to PRC issuers (but not overseas issuers). The Exchange proposes to adopt a consistent framework in relation to the matters below, regardless of the issuer's place of incorporation.
The new regulatory regime may bring about some positive changes to PRC issuers. PRC issuers might find it easier to undertake corporate actions relating to the issuance and repurchase of shares (as class meetings and special resolutions will no longer be required). If the separate mandate limits for share issuances are removed, a PRC issuer may also have more flexibility within the overall cap to decide how many H shares it may wish to issue.
As domestic shares and H shares will no longer be treated as different classes of shares, uncertainties remain as to how other Hong Kong laws / regulations will be applied (e.g. disclosure of interests under the Securities and Futures Ordinance, application of the Takeovers Code). The market will need to wait for additional guidance on these matters.
For further information, please reach out to your usual contact at Ashurst or the partners mentioned below.