Investment regulation - Hong Kong

19.04.2018

Hong Kong securities

Holding restrictions

Foreign shareholding in Hong Kong companies is not limited except for:

Threshold

Requirement

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

Nil

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.

HKEx

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.

Stock Connect

Foreign ownership limits

Threshold

Requirement

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

  • reaches 26%, the Shanghai Stock Exchange and the Shenzhen Stock Exchange will publish notices on their websites;
  • reaches 28%, Northbound buy orders in that security will not be allowed until aggregate foreign shareholding is less than 26%;
  • exceeds 30%, the foreign investors concerned will be requested to sell the shares on a last-in-first-out basis within five trading days.

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.

Eligible investors

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.

Mainland China Rules and Regulations on Beneficial Ownership

Article 7 and 13 of Certain Provisions on the Stock Connect Pilot Program (“China Securities Regulatory Commission (CSRC) Stock Connect Rules”) reinforces that:

  • Hong Kong Securities Clearing Company Limited  (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.

The Stock Connect Pilot Program Provisions (issued and effective as of 26 September 2014) also state that HKSCC:

  •  Shall exercise rights against the issuer of shares listed on the Shanghai Stock Exchange (SSE) in accordance with the instructions of the northbound investors (Article 118); and
  • As nominee holder, does not have any disclosure obligation that resides with the actual investors (Article 115).

In response to the concerns expressed by market participants, CSRC released frequently asked questions (FAQs) on beneficial ownership on 18 May 2015, explaining the concept of “nominee holder” and “beneficial owner”. They are recognized under Mainland law as follows:

  • 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 their 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 will be fully respected by CSRC.

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 China Connect. 

Bond Connect

Eligible investors

With reference to PBOC’s announcement on Notice No. 3 [2016] and Notice No. 202 [2015], 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.

Disclosure requirements

For details of the local domestic disclosure requirements, please refer to the Disclosure Requirements.