- As of November 2015, India has been added to the list of “Acceptable Overseas Jurisdictions” published by the Stock Exchange of Hong Kong Limited (the Hong Kong Stock Exchange). Indian companies seeking to list in Hong Kong are now able to list depositary receipts (DRs) on the main board of the Hong Kong Stock Exchange. A Country Guide for India was issued in November that gives guidance on the Hong Kong Stock Exchange’s treatment of listing applications from Indian issuers. With the addition of India, Hong Kong now allows listings from 23 jurisdictions (in addition to the recognized jurisdictions of Hong Kong, the People’s Republic of China, the Cayman Islands and Bermuda).
- The India Country Guide states in main that (i) Indian shareholder protection standards are materially similar to those set out in the revised Joint Policy Statement Regarding Listing of Overseas Companies (27 September 2013) (the JPS) by the Hong Kong Stock Exchange and the Securities and Futures Commission (SFC) (http://www.hkex.com.hk/eng/rulesreg/listrules/listsptop/listoc/Documents/new_jps_0927.pdf) and (ii) India meets the Hong Kong Stock Exchange’s international regulatory co-operation requirements because it already has adequate measures in place with the Securities and Futures Commission.
- The ability to list in Hong Kong provides an opportunity for Indian companies to access a new pool of funds and deepen their investor base. A listing on the Hong Kong Stock Exchange may appeal to Indian companies with established operations or brand recognition in China.
- Indian companies interested in listing in Hong Kong should note that the Country Guide cannot be used in isolation. It is a supplement to the Main Board listing rules and the JPS. The guide provides a good starting point for understanding the path towards listing, but there are a range of further requirements that an interested party would need to take into consideration including with respect to shareholder protection standards, practical and operational matters and accounting and auditing related requirements.
Following its formal determination that India is an “Acceptable Jurisdiction” as an issuer’s place of incorporation, on November 16, 2015, the Hong Kong Stock Exchange issued a new “Country Guide – India”. The Country Guide applies to primary and secondary Main Board listing applicants incorporated in India and sets out, among other things, comprehensive and user friendly guidance on how companies incorporated in India can meet the requirement for equivalent shareholder protection standards in the Hong Kong Stock Exchange Main Board listing rules (the Listing Rules). The stated aim of the Country Guide is to enhance applicants’ understanding of the Hong Kong Stock Exchange’s expectations, practices, procedures and considerations when applying the Listing Rules to overseas issuers. . The Hong Kong Stock Exchange does not accept applications for DR listings on its Growth Enterprise Market (GEM) and, as a result, Indian companies cannot list on GEM.
Background to listing in Hong Kong
The listing of an overseas company in Hong Kong is regulated by two independent entities, the Hong Kong Stock Exchange, a wholly owned subsidiary of the Hong Kong Exchanges and Clearlng Limited, which among other things operates the securities and derivatives markets and related clearing houses and is the frontline regulator of listed companies in Hong Kong, and the SFC, which is an independent statutory body set up to regulate Hong Kong’s securities and futures markets. The Listing Rules are promulgated and implemented by the Hong Kong Stock Exchange. In 2013, the Hong Kong Stock Exchange and the SFC issued the JPS, which superceded an earlier joint policy statement issued in 2007 and guidance provided subsequently by the Hong Kong Stock Exchange. The objective of the JPS is to assist overseas companies seeking either a primary or secondary listing in Hong Kong and its scope covers (i) shareholder protection standards, (ii) regulatory cooperation arrangements, (iii) accounting and auditing related and other disclosure requirements, (iv) practical and operational matters challenging for overseas companies and (v) the suitability requirements for a secondary listing.
Scope of the Country Guide
The Country Guide states that the Hong Kong Stock Exchange will consider a listing of DRs for India incorporated issuers. The Country Guide provides guidance on how the Hong Kong Stock Exchange will consider certain matters under the revised JPS and, where appropriate, includes the Hong Kong Stock Exchange’s views and analysis. The Country Guide should be read in conjunction with the JPS, which has consolidated all relevant issues regarding the listing of overseas companies into a single document. Listing applicants are expected to confirm to the Hong Kong Stock Exchange at the time of their initial application for listing that the Indian laws, regulations and markets practices described in the Country Guide are still applicable, or provide details of any changes, and inform the Hong Kong Stock Exchange of any other laws, regulations or market practices that are relevant to its circumstances.
Specifically, the Country Guide addresses the following:
International regulatory cooperation measures: The Country Guide states that India meets the JPS international regulatory co-operation requirements because the Securities and Exchange Board of India is a full signatory of the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information. If an issuer is incorporated in India but its place of central management and control is elsewhere, similar international co-operation arrangements must generally also be in place with that jurisdiction.
Shareholder protection standards: The JPS sets out key shareholder protection standards that are required of each overseas applicant. The Country Guide states that Indian shareholder protection standards on matters that require shareholders’ approval (such as matters requiring a super majority vote, the increase in the liability of an individual member and the appointment, removal and remuneration of auditors) and proceedings at general meetings are materially similar to those in Hong Kong. Certain differences were noted in the Country Guide such as the lower voting threshold required to approve a voluntary winding up of an Indian issuer and the limited right of proxies under Indian law to speak at general meetings and creditor meetings. Indian issuers are required to demonstrate how these matters are addressed in their constitutional documents and elsewhere to conform to the JPS requirements.
Practical and operational matters: The JPS contains guidance on an overseas issuer’s ability to comply with Hong Kong’s rules and regulations; the eligibility of securities for deposit, clearance and settlement in Hong Kong’s Central Clearing and Automated Settlement System (CCASS); cross border clearing and settlement; the use of Hong Kong DRs to overcome operational and legal difficulties in listing shares; reporting and disclosure of taxation issues; and requirements relating to stock name identification. The Country Guide contains guidance relating to registers of securities. The Hong Kong depositary must be a suitably authorized and regulated financial institution acceptable to the Hong Kong Stock Exchange, the deposit agreement must be in a form acceptable to the Hong Kong Stock Exchange and the governing law of the deposit agreement must either be Hong Kong or one that is generally used in accordance with international practice. The listing document must have full details of all the deposit, clearing and settlement arrangements and risks to the Indian issuer and its DR holders. The Country Guide also notes that there is an inconsistency between the Listing Rules’ requirement that a listed issuer’s constitutional documents provide that rights attaching to shares not be impaired by reason solely that interested holders have failed to disclose their interests to the issuer and Indian law, which subjects beneficial holders to a monetary fine if they do not disclose the nature of their interest to the company and the names of the registered holders among other matters. The Hong Kong Stock Exchange is prepared to grant a waiver from strict compliance with that requirement of the Listing Rules to the extent it would contravene Indian law.
Accounting and auditing related requirements: Indian issuers will need to either (i) demonstrate to the Hong Kong Stock Exchange that Indian generally accepted accounting practices and auditing standards are comparable to those required in Hong Kong or (ii) submit accountants’ reports and financial statements prepared in conformity with Hong Kong Financial Reporting Standards, International Financial Reporting Standards or US Generally Accepted Accounting Principles.
Taxation: The Country Guide does not provide an analysis of tax matters. Indian issuers are expected to disclose prominently in their listing document: (i) details of any withholding tax which is payable by investors in its securities; (ii) details of any treaty between India and Hong Kong that may affect any taxes payable; (iii) the effect of holding DRs though or outside CCASS on any tax payable; and (iv) the procedures for claiming any tax relief or exemptions.
Implications of the issuance of the Country Guide
As of November 16, 2015, there were no India incorporated companies listed on the Hong Kong Stock Exchange. With the formal recognition of India as an Acceptable Jurisdiction and the issuance of the Country Guide, Indian companies now have a roadmap for navigating the Hong Kong listing process. This is a welcome development for Indian companies, especially those with established operations or brand recognition in China, that want additional capital raising options. Given the current strength of the Hong Kong listing market, and the potential availability of several waivers to the Listing Rules by the Hong Kong Stock Exchange, Hong Kong may now be seen as an attractive, cost efficient listing alternative, especially if valuations meet expectations. There are still, however, several technical hurdles to overcome. Forward planning and engagement with sponsors, counsel and the Hong Kong Stock Exchange would be prudent.