Investment regulation - Hong Kong
Hong Kong securities
Foreign shareholding in Hong Kong companies is not limited except for:
Television Broadcasts Ltd
Individual foreign shareholding: maximum 10%
Aggregate foreign shareholding: maximum 49%
Foreign investors are required to obtain written approval from the Broadcasting Authority before they are allowed to hold, acquire or exercise 2-4%, 4-6% or 8-10% of the total voting control of Television Broadcasts Ltd (TVB).
Tracker Fund of Hong Kong
Not allowed for U.S. investors except “Qualified Institutional Buyer” as per Rule 144A of the U.S. Securities Act and “Qualified Purchaser” as per Section 2 of the U.S. Investment Company Act.
Note Issuing Banks (NIBs)
Shareholding of less than 20% in any of Hong Kong's three local NIBS (Standard Chartered, HSBC or Bank of China, Hong Kong) for foreign governments or entities.
Pursuant to section 3(5) of the Legal Tender Notes Issue Ordinance, conditions have been attached to the authorisation of the NIBs to enforce this policy.
Shareholding of less than 5% for foreign and local investors.
The limit is valid for foreign and local investors except with the approval of the SFC in consultation with the Financial Secretary.
Foreign ownership limits
Individual limits: maximum 10%
Per Article 12 of CRSC China Connect Rules, a single overseas investor’s total shareholding in a listed company must not exceed 10% of the listed company’s total issued shares.
The foreign investor should take into consideration both domestic and overseas issued shares of the listed Mainland China incorporated company.
Aggregate limits: maximum 30%
Per current Mainland China rules, aggregate foreign investors’ shareholding in the A-shares of the listed company must not exceed 30% of the company’s total issued shares.
If aggregate foreign shareholding of an individual share
A-shares purchased through Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect (Stock Connect) will be considered together with those purchased by QFII and RDII, and be subject to the same foreign shareholding restriction. Once the aggregate foreign shareholding of an individual A-share company reaches 28%, the Stock Exchange of Hong Kong Limited (SEHK) will not allow further Northbound buy orders in that company, until the aggregate foreign shareholding is sold down to 26%. If the 30% threshold is exceeded due to Stock Connect buy trades, SEHK will contact the relevant EPs for the forced-sale requirements.
Normal selling can still be conducted even if the aggregate foreign shareholding of the security has exceeded the 30% threshold.
Please note that foreign investors can continue to sell the A-share when aggregate foreign shareholding has reached the 30% threshold. If such selling activities cause the aggregate foreign shareholding to drop below 30% threshold within five trading days, EPs who were subject to the forced-sale requirement may submit application to the SEHK for forced-sale exemption.
Short-swing profit rule
Under Article 47 of the PRC Securities Law, the short-swing profit rule is triggered if a director, supervisor, senior manager or shareholder who holds more than 5% of the shares of a listed company sells shares of that company within six months after purchasing them, or purchases the shares of that company within six months after selling them.
Open to all Hong Kong, overseas institutional and individual investors, except for ChiNext under Shenzhen Stock Exchange which maybe only traded by institutional professional investors in the initial stage.
Stock Connect and Holding Structure
One key difference between QFII/RQFII and Stock Connect is that QFII/RQFII investors are required to open onshore, segregated accounts at ChinaClear, while Stock Connect Northbound investors are not required or able to do so. The Mainland authorities allow HKSCC to maintain an omnibus account at ChinaClear for holding all SSE/SZSE securities purchased through Stock Connect. The CSRC rules state that HKSCC is the “nominee holder”, holding the SSE/SZSE securities on behalf of Northbound investors (who is the beneficial owners of the SSE/SZSE securities). Northbound investors could open an omnibus or segregated account with their broker or custodian bank in Hong Kong.
According to Article 13 of the Certain Provisions on Shanghai-Hong Kong Stock Connect Pilot Program (the “CSRC Stock Connect Rules”), shares acquired under Stock Connect Northbound trading shall be registered in the name of HKSCC.
In addition, with reference to General Rules of CCASS Rule 824, it has also been stipulated that SSE/SZSE Securities are held by HKSCC for the account of its participants in an omnibus account maintained by HKSCC with ChinaClear.
As there is no other alternative holding structure, HKSCC is taking the role of a Central Securities Depository (CSD) instead of a custodian, sub-custodian or safekeeping agent in respect of the Stock Connect Securities. This has also been elaborated in an FAQ prepared by the HKEx.
Recognition of Nominee Concept under PRC law
With the nominee concept under Stock Connect depicted above, the key question is whether investors enjoy beneficial ownership and proprietary rights in the Stock Connect shares held under such nominee structure.
China authorities have clarified that the nominee concept is not novel in China. It is recognized by the mainland authorities and found in various PRC regulations dating back to 2006. Some of the examples include:
- Article 12 of the Takeover Regulation issued by CSRC states that shares held by an investor in a listed company include not only those registered in the name of the investor, but also those not registered under its name for which it controls voting rights
- The CSRC’s Administrative Measures for Registration and Settlement of Securities (the “Settlement Measures”) issued in 2006 and amended in 2009, defines a nominee holder as an entity that is designated by and represents another person to hold securities
- The Settlement Measures also states that “securities shall be recorded in the accounts of the securities holders, unless laws, administrative regulations or CSRC rules prescribe that the securities shall be recorded in accounts opened in the name of nominee holders”. Hence, the Settlement Measures expressly provides for the concept of nominee shareholding
- ChinaClear Securities Registration Rules state that securities may be registered in the name of a nominee holder who enjoys the rights and benefits of a securities holder, but at the same time has obligations to the actual owners of the securities held through it. Those rules further provide that the actual securities owners shall realize their rights through their nominee holder, who shall act in accordance with the instruction of such owner
With the arrival of Stock Connect, the recognition of nominee concept has again been highlighted and defined in relevant Stock Connect laws and regulations.
Mainland China Rules and Regulations
Article 7 and Article 13 of Certain Provisions on Shanghai-Hong Kong Stock Connect Pilot Program (“CSRC Stock Connect Rules”) reinforces the fact that
- HKSCC is the nominee holder of shares purchased by overseas investors
- Investors are legally entitled to the rights and benefits of shares acquired through the Northbound Trading Link
Shanghai Stock Exchange Shanghai-Hong Kong Stock Connect Pilot Program Provisions (issued and effective as of September 26, 2014) also states that HKSCC
- Shall exercise rights against the issuer of shares listed on the SSE in accordance with the instructions of the Northbound investors (Article 118); and
- As nominee holder does not have any disclosure obligation which resides with the actual investors (Article 115)
In response to the concerns expressed by market participants, CSRC further released an FAQ on beneficial ownership on May 18, 2015, stating
- The concepts of “nominee holder” and “beneficial owner” are recognized under Mainland law
- Beneficial owners of SSE Securities shall exercise their rights over such securities through HKSCC as the nominee holder
- As long as an overseas investor can provide evidential proof of direct interest as a beneficial owner, the investor may take legal actions in its own name in Mainland courts
- If certification issued by HKSCC is treated as lawful proof of a beneficial owner’s holding of SSE Securities under HKSAR law, it would be fully respected by CSRC
The FAQ can be found here.
Hong Kong Rules and Regulations
HKSCC rules and regulations were amended and approved by SFC to make the following points clear.
1. According to Central Clearing and Settlement System (CCASS) rules 824 (Charter 8), HKSCC, as the nominee holder, has the obligation to
- present a certificate to the relevant Chinese authority or Chinaclear in order to provide evidential proof of the relevant participant or its client holdings in the Stock Connect securities at the relevant times; and
- HKSCC will assist participants or its clients in bringing any legal action in Mainland China as may be required under Mainland law (subject to conditions such as HKSCC requiring indemnities or payment of fees and costs in advance); and
- ensure that there are daily reconciliation procedures with the relevant China Connect Clearing House and within CCASS to make certain that the credits and debits of Stock Connect securities to and from each participant’s stock accounts are accurate.
2. HKSCC provides services to participants as set out in Chapters 8, 11 and 41 of the General Rules and the related CCASS Operational Procedures to enable them and their clients (as appropriate) to exercise their rights as owners of proprietary interests in SSE Securities, including the right to receive dividends and other distributions and the power to exercise voting rights.
Unless specifically stated in the General Rules, HKSCC will not exercise any rights arising from or in relation to any SSE Securities without the instruction of the participants.
3. HKEx has published FAQs discussing the beneficial ownership under Stock Connect.
Enforcement of Beneficial Ownership Rights
- As the beneficial owner of SSE/SZSE Securities under the nominee structure, investors enjoy the ability to assert, exercise and enforce its rights over such securities, and the rights are also clearly written:
- As provided in Chapter 11 of the CCASS Rules and Section 8 of the CCASS Operational Procedures, HKSCC will assert or exercise the above rights for or on behalf of HKSCC Participants and the underlying beneficial owners of SSE Securities under the Stock-Connect pilot scheme. These cover HKSCC’s obligations to distribute company announcements and communications, attend shareholders’ meetings and obtain voting instructions and instructions to deal with entitlements, dividends, distributions, and various kinds of corporate actions of listed companies
- Mainland China law does not prohibit a beneficial owner of shares from directly suing a company, its directors or management in Mainland China
- If beneficial owner of Stock Connect Securities (invested through Stock Connect) would like to take legal action directly in the Mainland courts against a listed company to enforce its rights, as set out in CCASS Rule 824, HKSCC is prepared to provide assistance to the beneficial owners of SSE/SZSE Securities where necessary, upon request and after receiving the necessary information
- Provide certification to ChinaClear for the purpose of providing evidential proof of the holding in SSE Securities at the relevant time
- Assist beneficial owner in bringing the legal action in Mainland China, after having regard to its statutory duties and subject to such conditions as HKSCC may reasonably require (including payment of fees and cost up-front and indemnities to the satisfaction of HKSCC)
With reference to PBOC’s announcement on Notice No. 3  and Notice No. 202 , Key revisions are summarised as follows:
Eligible investor type
- Financial institutions that meet the requirements set out in this Notice and registered outside People’s Republic of China, including commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions;
- Investment products lawfully launched by the aforesaid institutions;
- Other mid-term and long-term institutional investors such as pension funds, charity funds and endowment funds etc.
Investor eligibility requirement
- Incorporated in accordance with relevant laws of its domiciled country/region;
- Have a sound governance structure and adequate internal control mechanism;
- No significant penalties imposed by regulatory authorities on its bond investment business in the last three years due to violation of laws or regulations;
- Fund comes from legitimate source;
- Able to identify and undertake risks in bond investment;
- Other requirements set by PBOC.
For more information, please refer to the China Bond Connect website
Beneficial Ownership Rights and Recognition
In the People’s Bank of China (PBOC) Interim Measures and Q&A published on 22 June 2017, it is explicitly stated and confirmed that:
- CMU shall open a nominee account with China Central Depository & Clearing Co., Ltd (CCDC)/ Shanghai Clearing House (SHCH) as nominee holder of the bonds purchased by foreign investors through Bond Connect. Foreign investors are entitled to “enjoy the rights and interests of the bonds according to law.”
- Bond Connect can follow the multi-tiered custodian arrangement and the ultimate investors are the beneficial owners of the relevant bonds and shall exercise their rights against the bond issuer through the nominee holder (CMU).
- If overseas investors are able to provide evidence that they have direct interest in a case as the beneficiary owner of the bonds, they may file a lawsuit against the bond issuer in the Mainland courts directly in their own name.
- Chinese courts will respect arrangements under Hong Kong rules or law on how beneficial ownership is to be evidenced for Bond Connect securities.
The draft FAQs published by CMU state that the issuance of certificates of bond holding for the CMU member is part of the CMU’s corporate action service. Based on the certificate of bond holding issued by the CMU, or similar bond holding documentation provided by the CMU member and the relevant global custodian, end investors will have documentary evidence of beneficial ownership of their bond under Bond Connect.
For details of the local domestic disclosure requirements, please refer to the Disclosure Requirements.