Market Turnover


Stock Exchange invites comments on draft sponsor and independent financial adviser rule amendments

04 May 2004

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), today (Tuesday) invited Hong Kong sponsor and financial advisory firms to comment on draft amendments to the Exchange Listing Rules.

The draft amendments reflect the results of extensive public consultation conducted by the Exchange and the Securities and Futures Commission (SFC) in conjunction with the release in May last year of their joint Consultation Paper on the Regulation of Sponsors and Independent Financial Advisers (IFAs).

The consultation drew 129 responses. Most were very supportive of the general thrust of the proposals to enhance the overall standards of sponsors and IFAs.  On the other hand, respondents expressed concerns over the potential of the original proposals for duplication in the registration, licensing and supervision process, as well as the enforcement activities of the Exchange and the SFC.  Concerns were also expressed about the proposed declaration by sponsors in public documents. 

The Listing Committee considered the way forward at its policy meeting in December 2003 and subsequent to that meeting the Exchange and the SFC have agreed to proceed with the reforms to the regulation of sponsors and IFAs in two stages. 

The first stage involves amendments to the Listing Rules (Main Board and GEM) and the introduction of a revised statement on conduct to clarify the Exchange's expectations with regard to due diligence.  The second stage involves enhancement of the SFC regulatory regime focusing on sponsors and IFAs.  This will concentrate on eligibility criteria as well as on-going supervision and enforcement. The SFC has indicated that it will publish a further consultation paper on this subject during the fourth quarter, 2004.

The purpose of the invitation to comment by the Exchange is to advance the first stage of reform by inviting those most directly interested to review the draft rule amendments dealing with due diligence, independence, continuing sponsorship. The draft text reflects the policy direction approved by the Listing Committee and after input from SFC staff. This exercise will help ensure that there are no unintended consequences arising from the manner in which the rule amendments have been drafted and to identify ambiguities within the draft text.

The Exchange intends to finalise the rule amendments and seek the SFC's approval of the rule amendments by the end of June 2004 for implementation from 1 October 2004. The Exchange and SFC will publish a Consultation Conclusions Report on the May 2003 consultation exercise at the same time the amended rules are published.

"The rule amendments will codify our current expectations concerning due diligence and this should address the expectation gap that has developed between investors, regulators and sponsors", the HKEx's Head of Listing, Mr Richard Williams, said.

"Failure to meet these standards may involve breaches of the SFC's Code of Conduct for Corporate Finance Advisers and as a result the market should be left in no doubt that there will be licensing consequences for a significant failure to meet expected standards. This is particularly important given the special role of sponsors in Hong Kong, due to the unusually large proportion of listed companies and listing applicants whose domicile and main operations are located outside the jurisdiction", he said.

Notes to Editors:


The Secretary for Financial Services and the Treasury published the Corporate Governance Action Plan for 2003, a co-ordinated approach by the Government, the SFC and the Exchange to improve corporate governance on 10 January 2003. The plan contained measures to tighten the regulation of IPO intermediaries, including a proposal to conduct a consultation exercise and to make amendments to the Listing Rules.

The consultation exercise commenced with the Consultation Paper jointly published by the Exchange and the SFC in May 2003 in relation to proposals to reinforce the regulatory regime for sponsors, underwriters and independent financial advisers. The consultation period closed on 31 July 2003 and drew a total of 129 submissions.

Summary of draft rule amendments

The effects of the amended Main Board and GEM Listing Rules are that:

1. in most circumstances, an issuer (including a new listing applicant) will be required to appoint a sponsor in the case of the issuer's initial application for listing (including deemed new listing);

2. in most circumstances, the issuer will be required to continue to have a sponsor appointed after the issuer is listed and until publication of the issuer's financial results for the first full financial year after the issuer's date of initial listing, but, consistent with the existing requirement in the GEM rules (rule 6.02), the Exchange may also direct that an issuer appoint a sponsor at any other time (for example, the Exchange may direct appointment of a sponsor as a continuing adviser to an issuer when the issuer has been held to have breached the Exchange Listing Rules).  The continuing sponsor need not be the IPO sponsor;

3. an issuer will be able to decide whether it will engage one sponsor or a number of sponsors but all sponsors appointed by the issuer will be jointly and severally responsible for the discharge of the sponsor's duties as set out in the relevant Listing Rules;

4. a sponsor or an IFA will be required to perform its duties with impartiality and avoid relationships or connections with the issuer that would compromise the sponsor's or IFA's objectivity.

5. where an issuer appoints one sponsor, it will be required to be independent of the issuer.  Where an issuer appoints more than one sponsor, at least one of the sponsors appointed will be required to be independent of the issuer.  All IFAs must be independent.  The Listing Rules will set out the circumstances in which the Exchange would consider that a sponsor or IFA is not independent of the issuer;

6. the independent sponsor or IFA must make an independence declaration to the Exchange;

7. sponsors will not be required to make new declarations in listing documents, but they will have to submit a declaration to the Exchange stating, amongst other things, that all of the documents required by the Listing Rules to be submitted have been submitted and that they have made reasonable due diligence inquiries to confirm that, for example, the issuer is in compliance with all of the qualifications for listing set out in the Listing Rules;

8. in determining what are reasonable due diligence inquiries, the sponsor should have regard to a new practice note: "Due diligence by sponsors in respect of listing applications". This practice note will replace the Code proposed in the Consultation Paper. It will apply only to sponsor firms; not IFAs and not individuals; and

9. the proposed rules will also expressly require that IFAs conduct due diligence, for example, to satisfy themselves that there are no reasonable grounds to believe that any information, expert advice or opinion relied on in relation to the subject transaction or arrangement is not true or omits a material fact.


Indicative timetable

Copies of the draft rules dispatched to sponsor and financial advisory firms 4 May 2004
Posting of the draft rules on the HKEx website 5 May 2004
Meetings with sponsor and financial advisory firms 11 and 12 May 2004
Written comments on draft rule amendments due 18 May 2004
Publication of final rules and Consultation Conclusions Report July 2004
Rule amendments effective 1 October 2004

Updated 04 May 2004