The Hong Kong Securities and Futures Commission (SFC) has made a series of recommendations in a report on its review into the performance of The Stock Exchange of Hong Kong Limited (SEHK) in its regulation of listing matters.
The review saw the SFC drill down into the Listing Division's operations, processes and procedures in general and the regulator conducted a more in-depth review of SEHK's performance in reviewing business valuations included in the circulars for major or larger acquisitions and disposals, administering the Placing Guidelines for initial public offerings (IPO) and reviewing the IPO placee lists.
The report recommendations include a review of SEHK's internal guidance to enhance the placee vetting process and improvement of the disclosure practices relating to business valuations for major or larger acquisitions and disposals.
The report notes that the SFC first became concerned about potential misconduct in 2019.
"In 2019, the SFC noted there were recurring types of misconduct related to acquisitions and disposals by listed issuers which gave rise to concerns relating to the valuations of the underlying assets or businesses. We reviewed the Exchange's processes and procedures for reviewing business valuations included in the circulars for major (or larger) acquisitions and disposals.
- (a) In several transactions where there appeared to be material questions as to whether the considerations were fair and reasonable, we noted that the Exchange made pertinent enquiries and duly administered the Listing Rules.
- (b) In a number of cases reviewed, there appeared to be significant variations in the types and quality of the information disclosed in the circulars. The Listing Rules do not specify how and to what extent the bases for the agreed consideration, including any business valuation, should be described. We recommend that the Exchange take steps to improve the disclosure and other practices among listed issuers in this regard, particularly where the transactions in question involve the use of discounted cashflows as a methodology to value closely-held businesses or companies with no public trading prices and the listed issuer has not obtained a financial adviser's opinion on the valuation."
"We reviewed the Exchange's processes and procedures for reviewing the IPO placee lists and monitoring compliance with the Placing Guidelines for IPOs by intermediaries, as well as its criteria for granting consent for share allocations to specified persons under the Placing Guidelines, including "connected clients" and the listing applicant's directors and existing shareholders or their close associates.
- (c) From our review, possible red flags were noted in connection with the placee lists in some IPOs. There was no systematic process for reviewing the IPO placee lists which would enable the Exchange to identify "problematic" (eg, controlled) placees on a timely basis. In some cases, the pertinent issues relating to the placee lists submitted to the Exchange were dealt with at a late stage in the vetting process, thereby requiring last-minute changes to the IPO share allocations. In addition, in processing applications for its placing consent, the Exchange mainly relied on confirmations of independence provided by relevant parties without further scrutiny.
- (d) In addition, the Exchange's written procedures and training materials do not contain sufficient guidance on the factors which should be taken into consideration in assessing the independence or genuineness of the placees or in processing applications for the Exchange's consent for placing to connected clients."
The review conducted falls under the statutory duty of the SFC to "supervise, monitor and regulate the activities carried on by the Exchange."
Per a Memorandum Of Understanding (MOU), when conducting periodic audits or reviews the SFC will focus on:
- (a) whether the Exchange, in carrying out its listing regulatory function, has discharged and is discharging its duties under the SFO; this includes assessing its work in developing, administering and implementing its Listing Rules as well as the monitoring and enforcement of compliance with those rules;
- (b) the adequacy of the Exchange's systems, processes, procedures and resources for performing its listing function; and
- (c) the effective management of conflicts of interest within the Exchange as a regulator and as part of a for-profit organisation, including the supervisory functions performed by the Listing Committee.
