Hong Kong Venture Capital Private Equity Partnership Conference

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Balancing Rules with Market Forces
Hong Kong Venture Capital / Private Equity
Partnership Conference 22 September
2003 Presented by Herbert Hui the Chairman The
Hong Kong Institute of Directors
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• Recent Corporate Governance Changes

• The Securities and Futures Commission and the
  Stock Exchanges corporate governance action plan
  for 2003 contains the following five objectives
• upgrading the Listing Rules and Listing
  Functions
• tightening the regulation of intermediaries
  involved in initial public
• offerings
• rolling out the Securities and Futures
  Ordinance
• successfully completing the Standing Committee
  on Company Law
• Reform Phase II Corporate Governance Review
  and
• implementing the Standing Committee on Company
  Law Reform
• Recommendations from its Phase I Corporate
  Governance Review.

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• Upgrading the Listing Rules and Listing Functions

By 1st quarter 2003 Stock Exchange to complete
streamlining of the listing process in order to
improve quality control at the point of entry by
focusing on critical matters. The Stock Exchange
has introduced a revised Guidelines on New
Listing Applications. By 2nd quarter 2003
Stock Exchange to introduce amendments to the
Listing Rules and promulgate a revised Code on
Best Practice.

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• Upgrading the Listing Rules and Listing Functions

Contd
By 4th quarter 2003 The Administration to
follow up recommendations of the Financial
Secretary appointed Expert Group published on 21
March 2003 in relation to the delineation of the
roles of the Financial Services and Treasury
Bureau, the Securities and Futures Commission and
the Stock Exchange regarding listing.

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• Upgrading the Listing Rules and Listing Functions

By phases, starting from the 2nd quarter to 4th
quarter 2003 Stock Exchange to amend the
Listing Rules to improve the initial and
continuing listing requirements and delisting
procedures, following consultation started in
July and November 2002.

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• Tightening the Regulation of IPO Intermediaries

By 1st quarter 2003   The Stock Exchange
consultation paper on amendments to the Listing
Rules to tighten regulation of IPO
intermediaries, in particular sponsors and
financial advisors was released in May
2003.   The Securities and Futures Commission
consultation paper on amendments to the Companies
Ordinance to extend the prospectus-related
liability to sponsors of initial public offers,
and possibly, other intermediaries relating to
initial public offers, for ensuring quality
disclosure to investors was jointly released by
the Securities and Futures Commission and the
Stock Exchange in May 2003.

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• Tightening the Regulation of IPO Intermediaries

Contd
 By 3rd quarter 2003   Financial Services and
Treasury Bureau, in consultation with the Hong
Kong Society of Accountants, to finalise
legislative proposals to enhance the regulation
of the accountancy profession.

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• Securities and Futures Ordinance

Significant corporate governance changes brought
about by the Securities and Futures Ordinance
include

1. The time limit for disclosure of directors
dealings has been reduced from five days to three
business days and the percentage disclosure limit
has been reduced from 10 to 5. 2. The scope
of investigations into listed companies conducted
by the Securities and Futures Commission has been
widened considerably. The Securities and Futures
Commission can now more effectively enquire into
corporate misconduct which prejudices
shareholders interests.
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• Securities and Futures Ordinance

Contd

• 3. The market misconduct provisions of the
  Securities and Futures Ordinance establish civil
  liability and criminal offences relating to false
  and misleading information including securities
  transactions.
• 4. The new dual filing regime for listing
  applications and ongoing disclosures will
  strengthen disclosure standards.

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• Securities and Futures Ordinance

Contd

• 5. Additional powers are to be given to the
  Securities and Futures Commission to obtain
  documents and seek explanations from parties
  closely related to a listed company under
  investigation.
• 6. The Market Misconduct Tribunal was established
  to deal with insider trading, market
  manipulation, disclosure of false or misleading
  information etc.
• 7. Auditors are exempted from civil liability for
  reporting fraud or misconduct by listed companies
  to the Securities and Futures Commission.

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• Successful completion of Standing Committee on
  Company Law Reform
• Phase II Corporate Governance Review

By 1st quarter 2003   The Administration,
Securities and Futures Commission and Stock
Exchange to render full support to the Standing
Committee on Company Law Reform for completion of
its Phase II Review, with the Securities and
Futures Commission and Stock Exchange putting
forward further proposals to the Standing
Committee on Company Law Reform, including
amendments to the Companies Ordinance on related
party transactions, shareholders rights,
disclosure requirements, liability of
professional advisers relating to misstatements
in listing documents etc. The Consultation Paper
on Proposals made in Phase II of the Review was
published in June 2003.

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• Early implementation of Standing Committee on
  Company Law Reform Recommendations from its Phase
  I Corporate Governance Review

By 1st quarter 2003 In July 2003, the
Financial Services and Treasury Bureau and the
Securities and Futures Commission completed the
consultation process in relation to the issue of
empowering the Securities and Futures Commission
to conduct derivative actions for minority
shareholders of a listed company, including legal
issues, scope and effectiveness of remedies, and
possible implementation arrangements.

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• Early implementation of Standing Committee on
  Company Law Reform Recommendations from its Phase
  I Corporate Governance Review

Contd
By 2nd quarter 2003   The latest Companies
(Amendment) Bill to enhance corporate governance
by implementing Standing Committee on Company Law
Reform Phase I recommendations relating to
shareholders remedies was gazetted in June
2003.  

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• Early implementation of Standing Committee on
  Company Law Reform Recommendations from its Phase
  I Corporate Governance Review

Contd
By 4th quarter 2003   The Financial Services
and Treasury Bureau, in consultation with the
listed sector and the accountancy profession, to
finalise and take forward a proposal to establish
a Financial Reporting Review Panel to investigate
financial statements of companies and enforce
changes thereto.  

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• Balancing Act

• General
•  
• Development of corporate governance must have
• reference to the interests of all relevant
  parties
• especially during uncertain economic times.

 

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• Objectives

• The Securities and Futures Ordinance represents
  much more impressive hardware than existed
  before. The new rules give regulators more
  teeth. Therefore we need to focus on upgrading
  the software to ensure that there is a balance
  between the corporate governance rules and market
  forces.

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• Objectives

Contd

• Regulators face the challenge of delivering a
  clean and vibrant market as well as a healthy
  rate of growth for businesses, rather than just
  administering a tough regime.

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• Objectives

Contd

• The objective is high levels of compliance and a
  better, more transparent market.
• We need to ensure that Hong Kong continues to be
  an international financial centre as well as a
  major financial hub for businesses big and small
  and the market has very high expectations that
  the regulators will be able to achieve these
  objectives.

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• Methodology

• Regulators need to continue to
• consult with all business sectors across the
  board and in particular, professional investors,
  the medium size listed companies and SMEs and not
  just academics who are not directly affected by
  these new rules
• recognise the role of professional investors and
  review the uses of the information disclosed and
  determine whether the information required to be
  disclosed effectively satisfies professional
  investors need for information

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• Methodology

Contd

• understand the impact which the new rules will
  have on the operation of the companies and in
  particular, consider the effect it will have on
  the cost effectiveness and competitiveness of
  businesses in Hong Kong and balance this with the
  needs of professional investors

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• Methodology

• understand market forces, work with the market
  and help the market (industrialists/professionals)
  to truly understand the Securities and Futures
  Ordinance, the changes to the corporate
  governance rules and the principles of corporate
  governance generally. For example, the
  Independent Commission Against Corruption
  approach

Contd

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• Methodology

• continue to aggressively pursue and prosecute the
  right cases to the full extent of the law to send
  a clear message that deliberate misconduct will
  not be tolerated. Merely increasing the number
  of convictions is not enough. It is comforting
  that this is not the approach taken by the
  regulators

Contd

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• Criteria for Success

• The regulators have shown a commitment not just
  to improving corporate governance but also to
  balancing the needs of all interested parties.
• The effectiveness of corporate governance in
  Hong Kong lies not only in the new enhanced
  rules per se but also with the effective
  cooperation of three groups regulators,
  professional investors and company directors.

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• Criteria for Success

Contd

• An increase in the number of breaches of the
  rules is not indicative of success of the
  Securities and Futures Ordinance. Its success
  hinges upon
• the awareness and acceptance of the regulations
  and the need for corporate governance development
  within the business community
• the ability of regulators to ensure that the
  entire market (regardless of the size of the
  business) understands the regulations

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• Criteria for Success

Contd

• a practical and realistic approach being adopted
  at the grass roots level
• the cost of compliance being reasonable and not
  outweighing the benefits of raising corporate
  governance standards especially during uncertain
  economic times when companies are reluctant and
  perhaps unable to absorb the additional costs of
  complying with corporate governance rules
• the market remaining vibrant and dynamic and
  continuing to grow at an acceptable pace with an
  increase in the number of companies listed

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• Criteria for Success

Contd

• the ability of the regulators to handle the
  increased pressure to perform and adopt a more
  market oriented approach
• a greater awareness in the market of the
  importance of higher corporate governance
  standards
• a change in the attitude of directors and
  businessmen in Hong Kong
• the information needs of professional investors
  are understood and provided for, thereby
  encouraging investment and growth in Hong Kong.

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• Conclusion

Tougher standards must be administered
effectively and practically to achieve what we
are all aiming for namely, Hong Kongs enhanced
status as an international financial center. The
regulators are to be commended for their efforts
to clarify an otherwise confusing area and it is
hoped that they will continue to be sensitive to
and cater for existing and changing market
conditions and apply the new rules and utilise
their expanded powers to promote a dynamic
growing market and higher corporate governance
standards.

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