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Introduction
Issue
Whether there would be real interest in listing funds under Chapter 21
If the Exchange were to implement relevant changes
What we will touch on:
The background to Ch.21
Possible changes to the current regime to attract more funds to list under the Ch.21 regime
Comparable requirements in other fund jurisdictions
The issues for discussion
Current Routes to Listing
Ch.20 & Ch.21 Main Board Listing Rules
Chapter 20 Listings
Listing of funds authorized by the Securities and Futures Commission (SFC)
Subject to restrictions in the SFC’s Code on Unit Trusts and Mutual Funds (the UT Code)
Investment restrictions
fund’s holding of securities of any single issuer cannot exceed 10% of its total net assets (by value)
a cap of 10% on the number of ordinary shares a fund can hold in any single issuer
a cap of 15% of a fund’s total net asset value on the value of its holding of securities that are not listed, quoted or dealt in on a market
Restriction on borrowing
a fund cannot borrow more than 25% of its total net asset value
Excluding Real Estate Investment Trusts (REITS), all Ch.20-listed funds except one are open-ended, including many Exchange Trade Funds (ETFs) in Hong Kong
Chapter 21 Listings
Not authorized by the SFC
Not subject to the UT Code
Cannot be marketed or offered to the public in Hong Kong
Can be offered offshore or to “professional investors” in Hong Kong
Securities and Futures Ordinances (SFO) definition of “professional investors” includes:
Institutional investors
including banks, regulated intermediaries, pension funds, insurance companies, authorized funds etc.
High net worth investors
individuals with a portfolio of at least HK$8 mln (or the foreign currency equivalent)
companies with a portfolio of at least HK$8 mln (or the foreign currency equivalent) or total assets of at least HK$40 mln (or its equivalent)
Scrutiny of the Exchange gives a stamp of respectability to funds from unregulated jurisdictions
Less Stringent Regulatory Requirements
No need to be SFC-authorized or to comply with UT Code
Reasons for Listing under Chapter 21 (cont’d)
Less Restrictions on Investments
2 key restrictions
reasonable spread of investments: value of investment in any one body must not exceed 20% of the fund’s NAV at the date of investment (LR21.04(3)(b))
a fund cannot, either alone or with any connected person, take legal, or effective, management control of its underlying investments and, in any event, must not own or control more than 30% of the voting rights in any single company or body (LR21.04(3)(a))
Other Restrictions
no change in the investment objectives, policies and additional restrictions without prior shareholders’ consent for 3 years after the initial listing (LR21.04(5))
a person cannot control more than 30% of the votes exercisable at any general meeting of the fund (LR21.04(4))
funds are allowed to adopt additional restrictions (eg. borrowing powers)
Reasons for Listing under Chapter 21 (cont’d)
Attraction of a Chapter 21 Listing
“Technical listings” – for funds to be marketed outside Hong Kong
Ch.21 listing will attract institutional investors whose investment mandates only permit investment in listed securities
Some jurisdictions offer favourable tax treatment to investments in listed funds e.g. Japan
Restrictive Regime (cont’d)
Exchange’s Guidance Letter HKEx-GL17-10 imposes restrictions to ensure Ch.21 funds marketed only to professional investors
Restrictions imposed by Guidance Letter
Minimum Board Lot and Subscription Size
Funds must have a board lot size and minimum subscription size of at least HK$500,000 (subject to adjustment for special circumstances)
Intermediaries selling interests in Ch.21 funds must satisfy themselves that buyers are “professional investors” within SFO definition
A principles-based approach is allowed for intermediaries’ determination of whether customers meet the qualification thresholds under the Professional Investor Rules
The offering structure must be generally acceptable to the Exchange
Minimum Number of Shareholders
Ch. 21 fund must have at least 300 shareholders, unless a waiver is obtained. No waiver for a listed Chapter 21 company has been granted since 2004 (when required minimum no. of shareholders was increased to 300).
Minimum Market Cap.
Although Ch.21 funds not subject to market cap. requirement under Rule 8.09, in practice minimum market cap. must be HK$150 mln (because of required subscription size of HK$500,000 per placee and required minimum of 300 placees).
Prospectus Registration
Prospectus registration is not required, but where a fund proposes to register a prospectus, it must provide the Exchange with a submission from its sponsor & legal adviser on why the offering document is a prospectus
Note: An offer of shares in a fund to the public requires both the fund and its listing documents to be authorized by the SFC and comply with Ch.20 of the Listing Rules
Conflicts of Interest
Where the executive director is involved in the management of other funds at the same time
Internal control mechanism must demonstrate:
Directors have enough time and resources to manage the company
Confidentiality maintenance in accordance with professional standard
Disclosure of fair process of allocating investment opportunities between the company and other funds in a timely and equitable manner in the listing document
Restrictive Regime (cont’d)
Criticism
Regime remained more or less unchanged since introduction in 1989
Unfavourable listing environment for funds compared to foreign exchanges, especially the Irish Stock Exchange (ISE) and Luxembourg Stock Exchange (LuxSE)
Minimum of 300 Shareholders Requirement
Virtually impossible to achieve
Questionable co-existence with Listing Rule 21.04 which exempts Ch.21-listed funds from compliance with minimum public float requirement set out in LR8.08(1)
Guidance Letter contemplates possibility of derogation
Restrictive Regime (cont’d)
Share Price
Trade at a discount to net asset value
reflects the fund’s operational costs (often including the fund manager’s annual fee and performance fee which are deducted before dividend payment)
Tax Treatment
Profits Tax
Non-offshore Ch.21-listed fund has to pay HK profits tax
SFC authorized funds are exempted from profits tax
Restrictive Regime (cont’d)
Profits Tax (cont’d)
Offshore fund may be exempt for:
specified transactions, including transactions from which the trading receipts do not exceed 5% of the total trading receipts from the specified transactions and incidental transactions combined; and
transactions conducted through or arranged by a specified person
“Specified transactions”: include transactions in securities (other than the shares or debentures of a private company)
“Specified person”: an entity licensed by the SFC as a licensed corporation, or an authorised financial institution registered as a registered corporation, to conduct regulated activities under Part V SFO
Stamp Duty
Unlike ETFs listed under Ch.20, trades of Ch.21-listed shares are subject to stamp duty
Restrictive Regime (cont’d)
Listing Process
No streamlined application process in place – can be slow and costly
Lack of recent listings – considerable uncertainty in application approval
Conflicts of Interest
Often exist between the investment manager and the board of the investment company and between the investment company and the companies in which it invests
Principal requirements under the existing regime:
at least 1/3 of a listed investment company’s board must be made up of independent non-executive directors (INEDs);
the investment manager who must be licensed to conduct regulated activities Types 4 and 9 (advising on securities and asset management, respectively) must comply with the conflict of interest requirements of the SFC’s Fund Manager Code of Conduct and the Code for Persons Licensed by or Registered with the SFC.
Disclosure Requirements
The requirement to disclose investments only annually is considered to be insufficient
Disclaimers
This presentation is prepared by Charltons based on the information available to Charltons and not for public circulation. All the information is not independently verified by Charltons.
Charltons does not accept responsibility or liability for any loss or damage suffered or incurred by you or any other person or entity however caused (including, without limitation, negligence) relating in any way to this presentation including, without limitation, the information contained in or provided in connection with it, any errors or omissions from it however caused (including without limitation, where caused by third parties), lack of accuracy, completeness, currency or reliability or you, or any other person or entity, placing any reliance on this presentation, its accuracy, completeness, currency or reliability. Charltons does not accept any responsibility for any matters arising out of this presentation.
As a Hong Kong legal adviser, Charltons is only qualified to advise on Hong Kong law and we express no views as to the laws of any other jurisdictions. All the references to foreign laws herein are for information only and may not be up-to-date.
CH-004721
DM-104552_v6
20210115
Listing funds under Chapter 21 of Hong Kong Listing Rules
