Hong Kong’s Equity Market: A Guide to Issuing Company Shares on the Hong Kong Stock Exchange
This article lists the disclosure requirements for listed companies, types of Equity Offerings, and advantages and disadvantages of listing in Hong Kong.
The Hong Kong securities market dates back to 1866, but the stock market was fully created in 1891 with the establishment of the Association of Stockbrokers in Hong Kong. In 1914, it was renamed The Hong Kong Stock Exchange. It is required to get approval from the firm at a general meeting before issuing or awarding any shares. Following approval, the corporation can issue shares and inform the recipients.
Hong Kong Equity Market
The stock exchange in Hong Kong, where shares of firms, or equities, are traded, is known as Hong Kong’s equity market. It is a significant center for foreign investors and an important financial market in Asia. The Hong Kong Stock Exchange (HKEX) is the main exchange for trading stocks.
In terms of equity-related products and services, the HKEX provides a vast selection. These include debt instruments, real estate investment trusts, structured products, exchange-traded goods, and stocks.
Importance of the Hong Kong Stock Exchange
According to total market capitalization, the Hong Kong Stock Exchange (HKG) ranks third among stock exchanges in Asia. The Hong Kong Stock Exchange, with 2,538 listed firms in 2020, has a market value of HK$47 trillion. It serves as a gateway for foreign investors to the Chinese market, facilitating investment flows and attracting international investors through its H-shares platform. This makes it a crucial route for investors seeking to benefit from China’s economic expansion.
The Hong Kong Stock Exchange is a crucial global financial center, attracting foreign investors, businesses, and organizations for trading, investing, and raising finance due to its accessibility and reputation.
Types of Equity Offerings In Hong Kong
There are several types of equity offerings accessible in Hong Kong. Here are the key categories
Primary or Initial Public Offerings (IPOs)
Initial Public Offering (IPO) is the process by which private businesses offer shares to the public for equity funding. The Hong Kong equities market is expected to benefit from IPOs which are driven by factors like tech firm listing changes, foreign business initiatives, and market advancements.
A secondary offering is the sale of publicly traded shares to the public, originating from an IPO. This can involve preferential allotments, rights issues, or private placements to generate more money.
Inevitably a rights issue to shareholders is performed as a ratio-based tax-free dividend. In Hong Kong stock markets, rights issues are tax-free dividends distributed to shareholders in order to raise more funds. While open offers forbid trading in market rights, these strategies encourage present shareholders to purchase additional shares. Shareholders have the option to accept rights shares.
A private placement is when bonds or stocks are sold to institutions and pre-approved investors as opposed to the general public on the open market. It serves as an alternative to an initial public offering (IPO) for businesses seeking to generate capital for growth. The U.S. Securities and Exchange Commission’s Regulation D governs private placements.
Listing Requirements In Hong Kong
The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, widely referred to as the Listing Rules, regulate the conditions for securities listing in Hong Kong. These rules and regulations specify the requirements that businesses must meet in order to list their securities on the Hong Kong Stock Exchange.
The Listing Rules offer standards and guidelines for businesses looking to list their securities on the HKEX. The yearly listing costs for securities listed on the Hong Kong Stock Exchange are established depending on the nominal value of the listed securities.
The costs are determined by a specified fee schedule and are paid in advance. There are different fee schedules for businesses listed on the Main Board and the Growth Enterprise Market (GEM).
Eligibility criteria for companies seeking to list on the Hong Kong Stock Exchange
- Firms wishing to list on the HKEX should assemble a team of legal, accounting, and financial professionals, including sponsors and underwriters.
- The company prices shares allocated to investors and lists them on Hong Kong Stock Exchange for trading. The sponsor must be chosen at least two months before the IPO application is due.
- Professional advisors aid companies in due diligence and preparing a prospectus, providing investor information for informed investment decisions.
- Complete Listing Application (A1) filed to HKEX’s Listing Department, with the online publication of both the Chinese and English versions.
- The Listing Department (LD) reviews applications for eligibility, suitability, sustainability, compliance, and disclosure adequacy, providing initial comments within 15 business days.
- The Listing Committee (LC) reviews applications for IPO approval.
- The company prepares the marketing process with underwriters, LC approval, investor education, and an IPO roadshow.
General Listing Requirements In Hong Kong
A firm must comply with a number of conditions and processes in order to qualify for listing on the Stock Exchange of Hong Kong (HKEX). The general listing standards for Hong Kong are listed below.
- Minimum size and financial thresholds – These criteria ensure companies have financial viability and visibility, ensuring stability and market value. Exchanges also evaluate companies’ profitability, revenue, cash flow, and debt levels to ensure that only financially sound companies are listed.
- Track record and operating history – Companies that fulfill the required financial and track record standards are listed on the Hong Kong stock market. Professional advisers help with the listing process, do due diligence, and create a prospectus.
- Management and ownership requirements – The Corporate Governance Code (CG Code) lays forth the foundations of good governance, and the Main Board Listing Rules (MBR) provide three additional levels. A corporate governance report is required to be included by issuers in annual and interim reports.
- Compliance with regulatory and legal requirements – The Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Limited (HKEX) are responsible for enforcing regulatory compliance for the Hong Kong stock market. While HKEX runs the central securities and derivatives markets, the SFC promotes fairness, efficiency, competition, and transparency.
- Specific Listing Requirements – The Listing Rules of the Stock Exchange of Hong Kong Limited (HKEX) provide the particular listing criteria for shares traded on the Hong Kong market. The Growth Enterprise Market (GEM), a separate major board from the major Board, is one that the HKEX manages.
- Main Board vs. GEM Board listing requirements – The application for main board listing must be lawfully incorporated in a jurisdiction recognized by the HKEX. Applicants for the Main Board must fulfill a number of financial requirements, including the Profit Test, Market Capitalization/Revenue Test, and Cash Flow Test. GEM (Growth Enterprise Market) is a platform for small and medium-sized businesses to list their products or services. Companies engage experts to perform due diligence and prepare the prospectus (also called Application Proof AP) for investors, including sponsors, underwriters, attorneys, and accountants. The HKEX’s Listing Department receives the listing application, together with the AP, and verifies receipt before posting both the Chinese and English versions online.
Qualifications and Requirements for The Company’s Sponsor and Auditor In Hong Kong
A licensed corporation having a registered account with the Securities and Futures Commission (SFC) of Hong Kong is known as a sponsor and is in charge of supporting a firm during the listing process.
When giving advice on listing concerns sponsor:
- have the necessary experience and knowledge.
- completing due diligence,
- producing listing documentation
- assuring compliance with laws and regulations.
The auditor is responsible for unbiasedness:
- Evaluating a company’s financial accounts, following the qualifications and criteria set by the Hong Kong Institute of Certified Public Accountants (HKICPA) and SEHK.
- They must be objective, free of conflicts of interest, and a member of HKICPA or similar organizations.
- Auditors must have auditing expertise and a solid understanding of accounting rules and regulations.
- They must abide by HKICPA and relevant Hong Kong legislation. Issuers must form an audit committee consisting of independent non-executive directors, responsible for internal controls, auditor selection, and financial reporting.
Advantages and Disadvantages of Listing in Hong Kong
Listing in Hong Kong has both benefits and drawbacks. Here are a few crucial points.
Benefits of listing in Hong Kong
- Access to Capital – Companies that list in Hong Kong have the chance to raise capital by selling shares in an IPO to the general public. The corporation may utilize this infusion of new money for a variety of things, including expansion, debt repayment, research and development, and other future growth-related activities.
- Greater Visibility and Credibility – Companies can get visibility and raise knowledge of their skills, goods, and services by becoming public. It serves as a platform for showcasing the company’s potential and attracting a wider consumer base. Additionally, the listing can improve a business’s standing and trustworthiness, increasing its appeal to potential investors and business partners.
- Improved Liquidity – One of the main advantages of listing in Hong Kong is better liquidity. Companies may access a sizable pool of global investors and a thriving capital market by listing on the Hong Kong Stock Exchange (HKEX), which improves liquidity for their listed securities.
- Potential Tax Benefits – In general, income earned outside Hong Kong is not subject to taxation. This implies that businesses with Hong Kong listings may be able to save money on taxes on revenue earned elsewhere. In Hong Kong, there is no capital gains tax. Regardless of whether they originate in Hong Kong or abroad, dividends received by a Hong Kong business from another Hong Kong firm are typically tax-free. Both interim and final payouts are exempt from this requirement.
Potential drawbacks of listing in Hong Kong
There are various possible disadvantages that corporations may take into account while listing in Hong Kong. Here are some of the key drawbacks:
- Political and Regulatory Risks – The political and regulatory landscape in Hong Kong is dynamic and unstable. Companies with Hong Kong listings should think about how geopolitical events, government restrictions, and market sentiment can affect their operations.
- Competitive Listing Requirements – Compliance with particular regulatory standards and listing guidelines established by HKEx is necessary to list in Hong Kong. These criteria may be difficult and time-consuming, forcing businesses to devote substantial resources to the listing process and ongoing compliance.
- Market Volatility and Uncertainty – The Hong Kong Stock Exchange goes through times of volatility and market swings, just like any other stock market. Companies that list in Hong Kong are subject to various market risks, which may have an influence on the share price and performance.
- Limited Investor Base – Despite the fact that Hong Kong is a major financial hub, investors may be more concentrated in the Asia-Pacific area, particularly in Mainland China. Businesses aiming to attract investors from a wider global base would need to think about the potential barriers to doing so.
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In conclusion, the emergence of China and East Asia has drastically boosted the significance and growth of the Hong Kong equities market. HKEX operates the Stock Exchange of Hong Kong, which serves as a platform. The Securities and Futures Ordinance defines legislation for the Hong Kong equities capital markets.
As the only operator of the stock exchange and clearing houses, Hong Kong Exchanges and Clearing Limited (HKEX) serves as a crucial entry point for domestic and foreign investors looking to enter Asia’s dynamic markets. If you want to start issuing and managing shares, use our Eqvista App on the freemium trail and fully online. At Eqvista we offer various services regarding the issuing and management of shares. Reach us on the contact link right now!