Lexology In-Depth: International Capital Markets – Hong Kong, Edition 14

Rossana Chu

Partner, Hong Kong

Year in review

Developments affecting debt and equity offerings

Specialist technology companies

In March 2023, HKEX introduced a new regime for specialist technology companies to be listed on the Main Board,[2] even if those companies do not satisfy the usual profits, revenue and cash flow listing criteria. The regime is open to technology companies engaging in acceptable industries including next-generation information technology, advanced hardware and software, advanced materials, new energy and environmental protection, as well as new food and agriculture technologies.

There are two types of specialist technology companies, namely, a ‘commercial company’, which has commercialised its technology products with a revenue of at least HK$250 million for the most recent audited financial year, and a ‘pre-commercial company’, which has not met such revenue threshold. The SFC and HKEX announced on 23 August 2024 that the minimum market capitalisation requirements for listing are reduced from 1 September 2024 to 31 August 2027. For commercial companies, the requirement is adjusted from HK$6 billion to HK$4 billion and for pre-commercial companies, from HK$10 billion to HK$8 billion.[3]

Special purpose acquisition companies

In respect of the Main Board listing regime of special purpose acquisition companies (SPAC) and their successor companies (which was introduced in January 2022),[4] on 23 August 2024, the SFC and HKEX announced modifications in certain requirements, which are applicable from 1 September 2024 to 31 August 2027.[5]

The required minimum independent third-party investments committed by the time of announcing the De-SPAC transaction is modified to the lower of

1. the currently prescribed percentage of the negotiated value of the De-SPAC target, or
2. HK$500 million in value.

The independence test for third-party investors in a De-SPAC transaction is aligned with that for sophisticated independent investors in specialist technology companies.

GEM listing reforms

Following the public consultation on GEM listing reforms launched in September 2023,[6] HKEX issued the consultation conclusions in December 2023,[7] announcing reforms to GEM that took effect on 1 January 2024.

A GEM listing applicant must have a trading record of at least two financial years with positive cash flow of at least HK$30 million generated from its operating activities in the ordinary and usual course of business. Its minimum market capitalisation at the time of listing is HK$150 million. Such listing qualifications remain the same, but the GEM listing reform introduced a new financial eligibility test, targeting high-growth enterprises that are heavily engaged in R&D activities but have not generated positive cash flow. Under the new test, the applicant must have:

• an adequate trading record of at least two financial years;
• a revenue of at least HK$100 million in aggregate for the two most recent financial years, with year-on-year growth over the two years;
• incurred R&D expenditure of at least HK$30 million in aggregate for the two financial years prior to listing, where the R&D expenditure in each year is at least 15 per cent of its total operating expenditure; and
• an expected market capitalisation of at least HK$250 million at the time of listing.

Another significant change brought about by the reform is the relaunch of a streamlined mechanism for GEM-listed companies to be transferred to the Main Board without having to appoint a sponsor to conduct due diligence or issuing a ‘prospectus-standard’ listing document. Nevertheless, the transfer applicant must:

• meet all Main Board listing qualifications;
• for the three prior full financial years, fulfil the ownership continuity and control requirements with no fundamental change in its principal business;
• have reached a minimum daily turnover threshold of HK$50,000 on at least 50 per cent of the trading days over a period of 250 trading days immediately preceding the transfer application until the transfer to the Main Board (the reference period);
• have a volume-weighted average market capitalisation over the reference period that could meet the minimum market capitalisation requirement of the Main Board (which is HK$500 million); and
• not have been held to have committed a serious breach of any Listing Rules in the 12 months preceding the transfer application and until the transfer to the Main Board, and not be the subject of any investigation by HKEX or any ongoing disciplinary proceedings in relation to a serious breach or potentially serious breach of any Listing Rules.

A GEM-listed company is no longer required to publish quarterly reports. The post-IPO lock-up period applicable to the GEM issuer’s controlling shareholders has been shortened from 24 months to 12 months where

1. no shares can be disposed of within the first six months after listing, and
2. within the second six months after listing, the shareholder cannot dispose of shares that would result in it ceasing to be the controlling shareholder.

Treasury shares

Hong Kong-listed companies are allowed to hold repurchased shares as treasury shares and resell or otherwise utilise the treasury shares from 11 June 2024 onwards, if the laws of their incorporation jurisdictions and their constitutional documents so allow.[8] Before such date, all shares repurchased by listed issuers must be cancelled. Listed issuers should provide appropriate instructions to the relevant parties (such as share registrars and brokers) to ensure that treasury shares are appropriately identified and segregated.

A resale by the listed issuer of its treasury shares will be subject to pre-emption similar to an issuance of new shares (i.e., the treasury shares shall be offered to all shareholders on a pro rata basis) or otherwise the resale must have been approved in advance by the shareholders in a general or a specific mandate.

The treasury shares may also be applied to satisfy share grants under share schemes or to be issued as consideration shares for acquisitions made by the listed company, provided that the relevant Listing Rules requirements are complied with.

A holder of treasury shares is required to abstain from voting on matters that require shareholders’ approval under the Listing Rules. Treasury shares are excluded from the calculation of issued shares amount under the Listing Rules, such as public float and size test calculation. A resale of treasury shares is subject to ad valorem stamp duty under the Stamp Duty Ordinance (Chapter 117 of the Laws of Hong Kong).

Sustainable finance products

As at 24 August 2024, there were 144 bonds shown on the Sustainable and Green Exchange (STAGE) portal of HKEX as sustainable finance products, out of which 114 are green bonds. The other categories are eight social, six sustainability, four sustainability-linked, one covid, four blue and seven transition bonds.[9]

Issuers of green bonds or bond programmes listed in Hong Kong include financial institutions (primarily banks), corporate entities and the Hong Kong government. The funds raised by financial institutions through these bonds are to finance or re-finance eligible green assets or projects including energy conservation and efficiency, renewable energy, green buildings, clean transportation, pollution control and sustainable management of water and waste water. Corporation issuers comprise property developers and public utilities companies due to their high energy consumption and motivation to improve their green initiatives. Notably, the Hong Kong government has issued 31 green bonds.

The proceeds from social bonds are to be used for projects like affordable drinking water, sanitation, transport infrastructure, essential health and education services as well as affordable housing. Sustainability bonds were issued to promote sustainability purposes such as the use of renewable energy and carbon emission reduction. Blue bonds were issued by Chinese provincial and municipal governments and banks for marine-based projects. Transition bonds were targeted at financing high-carbon sectors transitioning away from fossil fuels.

Developments affecting derivatives, securitisations and other structured products

Developments in the Stock Connect

The Stock Connect is a mutual market access programme through which investors in Mainland China and Hong Kong can trade and settle shares listed on the other market through the stock exchanges and clearing houses in their home market. The Shanghai-Hong Kong Stock Connect was launched in November 2014 and the Shenzhen-Hong Kong Stock Connect was introduced in December 2016.

The China Securities Regulatory Commission (CSRC) and the SFC reached consensus in August 2023 on the introduction of block trading under the Stock Connect.[10] When this initiative is implemented, offshore investors will be able to conduct block trades on the Shanghai Stock Exchange and the Shenzhen Stock Exchange through the northbound trading link.  Mainland investors will be able to conduct manual trades on the Hong Kong Stock Exchange through the southbound trading link. Block trades will allow investors to conduct negotiated transactions and provide price and execution certainty for large-sized deals.

Among the five key initiatives to enhance the integration and development of the capital markets in Mainland China and Hong Kong as announced by the CSRC on 19 April 2024, PRC-listed real estate investment trusts will be included in the Stock Connect.[11]

Exchange-traded funds (ETFs) were included in the Stock Connect in July 2022. The scope of eligible ETFs was expanded on 22 July 2024.[12] Relaxations were applied to eligibility criteria such as the thresholds of daily average assets under management, the total weighting of listed shares in benchmark index and the total weighting of Stock Connect eligible constituents in benchmark index.

China treasury bond futures

The SFC and HKEX announced on 24 November 2023 that China treasury bond futures contracts will be launched in Hong Kong.[13] This development was preceded by the steady increase in offshore investments in China treasury bonds (T-bonds) via the Bond Connect since its launch in 2017. The T-bond futures will provide a tool to hedge exposure to such Mainland assets and thus can facilitate further participation by offshore investors in the Mainland treasury bond market. Hong Kong’s current offshore Renminbi and China-product ecosystem includes MSCI China A50 Connect Index Futures contracts launched in October 2021 and the Swap Connect launched in May 2023. The addition of China T-bond futures will support a greater international participation in China’s equities and fixed-income markets, strengthening Hong Kong’s role as the world’s leading offshore Renminbi hub and broadening risk management opportunities.

Cases and dispute settlement

Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance

The Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Chapter 645 of the Laws of Hong Kong) (the MJRE Ordinance) came into operation on 29 January 2024. It implements the ‘Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region’ signed between the Supreme People’s Court of Mainland China and the Hong Kong government on 18 January 2019.[14]

The earlier reciprocal judgments could be recognised under the Mainland Judgments (Reciprocal Enforcement) Ordinance (Chapter 597 of the Laws of Hong Kong), which took effect in August 2008. Such ordinance is superseded by the MJRE Ordinance.

Under a judgment reciprocal enforcement system, if a judgment creditor holds a Hong Kong judgment in its favour that remains unsatisfied, it may file the Hong Kong judgment with the appropriate court in Mainland China to enforce it in the Mainland. A judgment creditor with a Mainland China judgment may enforce it via Hong Kong courts. Compared with the previous regime, the MJRE Ordinance establishes a more comprehensive mechanism for reciprocal enforcement of civil and commercial judgments made in Mainland China and Hong Kong.

The previous regime required the judgment creditor to demonstrate that the parties had agreed to submit to the exclusive jurisdiction of the courts in Mainland China or Hong Kong. The MJRE Ordinance replaces such exclusive jurisdiction agreement with a jurisdictional test based on the sufficiency of connection with the Mainland or Hong Kong (as the case may be). The connection can be established in different ways such as

1. the defendant resided in the Mainland,
2. the defendant had a representative office, branch or place of business in the Mainland,
3. the contract was to be performed in the Mainland,
4. the tortious act was committed in the Mainland, or
5. the parties agreed in writing to submit to the jurisdiction (whether exclusive or non-exclusive) of the Mainland courts.

The factors for establishing a connection with Hong Kong apply in the same way.

Under the previous regime, only monetary judgments from Mainland China or Hong Kong courts in commercial disputes could be enforced. The MJRE Ordinance expands the scope of judgments to include both monetary and non-monetary judgments in civil and commercial matters and also covers orders for compensation and damages from criminal proceedings. However, the Ordinance carries a list of exclusions such as judgments related to matrimonial cases, estate succession, certain intellectual property cases, insolvency, bankruptcy and proceedings for the recognition or enforcement of an arbitral award.

The MJRE Ordinance has broadened the coverage to judgments made by lower courts and tribunals. In the Mainland, judgments of all Primary People’s Courts are included along with those made by the Supreme People’s Court, Higher People’s Court and Intermediate People’s Court. On the Hong Kong side, judgments issued by tribunals (including the Labour Tribunal, Lands Tribunal, Small Claims Tribunal and the Competition Tribunal) are covered in addition to judgments of the Court of Final Appeal, the Court of Appeal, the Court of First Instance and the District Court (which were already included in the previous regime).

Joint forces of the SFC and the Insurance Authority

The SFC and the Insurance Authority (IA) entered into a Memorandum of Understanding on 28 September 2020[15] with the aim of specifying their responsibilities on the regulation of insurance-related investment products and the sharing of information in respect of persons regulated under their supervisory regimes. Such persons include authorised insurers and licensed insurance intermediaries that are regulated by the IA and persons licensed by the SFC. If a case falls within the functions of both regulators, they may commence a joint inspection or joint investigation to enhance action effectiveness and minimise duplication of efforts.

The IA appointed joint and several managers to take full control of the affairs and property of Tahoe Life Insurance Company Limited (Tahoe Life) in July 2024 after the insurance company failed to improve its corporate governance and submit audited financial statements for years.[16] Earlier, the SFC and the IA worked together in the investigation on certain related party transactions of Tahoe Life and its fund manager. Such joint operation was the first of its kind since the above-mentioned Memorandum of Understanding. It also proves the regulators’ shared dedication to upholding the integrity of Hong Kong’s financial market across its different sectors.

Heavy jail sentences imposed on market manipulation offences

The Court of First Instance sentenced two individuals to imprisonment of six years and eight months and another individual to imprisonment of four years and four months in July 2024 after they were found guilty of conspiracy to carry out false trading in the shares of Ching Lee Holdings Limited (Ching Lee) in a historic 22-day trial by jury. This is the heaviest jail sentence imposed on market manipulation cases since the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (SFO) came into effect in 2003. This case demonstrates the Court’s determination in imposing heavy sentencing as deterrence and punishment for large-scale market manipulation offences.[17]

The case involved highly sophisticated and complex market manipulation activities. The offenders obtained illicit profits of approximately US$16 million by conspiring to maintain an artificial turnover of the shares in Ching Lee via manipulative transactions among 156 securities accounts under their control for more than five months.[18]

The SFC, in conducting its investigations, had also obtained assistance from regulators in other jurisdictions including the CSRC, the Hong Kong Independent Commission Against Corruption, the Monetary Authority of Singapore, the Ontario Securities Commission, the Singapore Police Force, the United Kingdom Financial Conduct Authority and the US Securities and Exchange Commission.

Relevant tax and insolvency laws

Stamp duty reduction on stock transfers

The rate of Hong Kong stamp duty on stock transfers was reduced from 0.13 per cent to 0.1 per cent of the transaction value payable by each of the transferor and the transferee, effective from 17 November 2023.

Tax treatment of onshore gain on disposal of equity interests

Hong Kong does not tax capital gains. The gains or profits derived from Hong Kong on disposal of equity interests that are of capital nature are not subject to profits tax in Hong Kong and onshore losses on the disposal of the same nature are not tax deductible. Whether such gain is of capital nature is determined based on a ‘badges of trade’ analysis and relevant factors include frequency of similar acquisitions and disposals, holding period, holding percentage, reasons for purchasing or selling the equity interests. If the disposal gains are determined to be revenue in nature, they are subject to profits tax.

The Hong Kong government introduced a scheme to provide greater upfront certainty of non-taxation of onshore disposal gains of equity interests that are of capital nature. Accordingly, the Inland Revenue (Amendment) (Disposal Gain by Holder of Qualifying Equity Interests) Ordinance 2023 was enacted on 15 December 2023 to introduce a scheme where any disposal gain derived from Hong Kong by an eligible investor entity meeting specified conditions is to be regarded as capital in nature and not chargeable to profits tax and there is no need to conduct the ‘badges of trade’ analysis. The scheme applies to disposal gains from disposals of equity interests that occurred on or after 1 January 2024 and accrued in the basis period for a year of assessment beginning on or after 1 April 2023.[19] 

The scheme covers any interest that carries rights to the profits, capital or reserves of the investee entity and is accounted for as equity in investee entity’s books, such as ordinary shares, preference shares and partnership interests, but excludes

1. equity interests that are regarded as trading stock for tax purposes, and
2. non-listed equity interests in any investee entity that engages in property trading, property development or property holding.

The investor entity must have held the equity interests throughout the continuous period of 24 months immediately before the date of disposal and such equity interests constitute at least 15 per cent of all the equity interests in the investee entity on a group basis.

Keepwell deeds

In offshore bonds issued by a Mainland China-based enterprise or its subsidiaries, the onshore parent often provides a keepwell deed. Unlike a guarantee, this deed does not obligate the parent to make the payments if the issuer defaults. Instead, the parent ensures the issuer (and guarantor, if applicable) will remain financially stable. The enforceability of a keepwell deed is brought into question if the issuer and guarantor become insolvent.

In Nuoxi Capital Limited v. Peking University Founder Group Company Limited [2021] HKCFI 3817, the defendant, as parent of the bond issuers, provided keepwell deeds that were governed by English law with exclusive Hong Kong jurisdiction. Afterwards, the defendant itself faced financial difficulties and consequently an administrator was appointed by the Chinese court to commence reorganisation. When the issuers and guarantors defaulted, the defendant failed to fulfil the keepwell promises and thus the matter was tried in the Court of First Instance of Hong Kong. The defendant’s administrator rejected the plaintiffs’ payment claims, arguing that it was not possible for the Chinese regulatory authorities to approve transfer of the defendant’s funds out of China to satisfy the claims given the defendant’s insolvency. The Court held that the disputes in those keepwell deeds should be determined in Hong Kong. However, considering the remote likelihood of Chinese approvals as suggested by the administrator, the Court only made a declaration that the defendant breached the keepwell deeds and dismissed the claims brought by the three plaintiffs.

In the appeal case, Nuoxi Capital Limited, HongKong JHC Co Limited and Kunzhi Limited v. Peking University Founder Group Company Limited [2024] HKCA 445, the Court of Appeal ruled that the obligations under the keepwell deeds are binding and enforceable in the Hong Kong courts. Further, notwithstanding the Chinese regulatory approval requirement, the Court decided that if the defendant could make the payments by other methods that do not require such approvals (such as the utilisation of assets already outside Mainland China), the plaintiffs’ claims should be allowed. This judgment in this appeal case clarifies some common cross-jurisdictional issues in a typical keepwell deed.

Role of exchanges, central counterparties and rating agencies

Severe weather trading of Hong Kong securities and derivatives markets

From 23 September 2024 onwards, the Hong Kong's securities and derivatives markets will remain open and maintain normal operations in a digital and remote manner during severe weather conditions.[20] Over time, the Hong Kong financial markets have developed digital and online facilities that proved to be robust during the COVID-19 closure times. The city can now keep the securities and derivatives markets open for trading during severe weather conditions (i.e., when ‘Typhoon Signal No. 8’ or above is hoisted or after a ‘Black Rainstorm Warning’ or an ‘Extreme Conditions’ announcement is made by the Hong Kong government).

Accordingly, during periods of severe weather conditions, trading, clearing and settlement services and operations in both the securities and derivatives markets (covering equity securities, debt securities, investment vehicles, exchange-traded products, structured products, futures and options) continue, including the northbound and southbound trading of securities under the Stock Connects. Full market data dissemination will be maintained, ensuring that market participants have access to essential information without disruption. Hong Kong banking services will be provided to facilitate the trading but only through electronic channels, while bank branches will close.

Uncertificated securities market in Hong Kong

At present, there are two main ways for investors to reflect their equity stakes in listed shares of Hong Kong-listed companies. The legal ownership of most listed shares is registered under the name of HKSCC Nominees Limited (HKSCC) or the names of the shareholders. HKSCC is the central nominee for shares held in the Central Clearing and Settlement System (CCASS) and is a subsidiary of HKEX. Investors own the beneficial interests in the listed shares via their accounts maintained with CCASS participants, which may be brokerage houses, banks or other financial institutions. Only the listed shares registered under HKSCC can be traded on the open stock market of HKEX and the share transfers are conducted in CCASS.

Yet, due to historical reasons, listed companies allow investors to hold shares in their own names, registering them as legal owners and issuing physical share certificates. These shares can be transferred privately, or must be deposited with a CCASS participant to be sold on the open market.

The SFC announced in July 2024[21] that an uncertificated securities market (USM) will be implemented in Hong Kong, after conducting public consultations.[22] The USM regime will enhance the efficiency and competitiveness of Hong Kong’s securities market by reducing the need for paper and manual processes, facilitating straight-through-processing and elevating the city’s financial market infrastructure.

The USM will encompass securities governed by laws compatible with the USM regime, including securities of listed issuers incorporated in Hong Kong, Mainland China, Bermuda and the Cayman Islands, which are the most common jurisdictions for Hong Kong-listed issuers. It applies to different types of listed securities, including shares, depositary receipts, stapled securities and funds, but excluding subscription warrants and rights under a rights issue (unless their underlying securities are already participating securities) and debt securities.

The SFC and the Hong Kong government are finalising the legislation to be submitted to the Legislative Council by the fourth quarter of 2024. If enacted by the first quarter of 2025, USM implementation is targeted by the end of 2025.

Within five years after the USM legislation is enacted and the USM is implemented, all the above-mentioned eligible prescribed securities must participate in the USM by following the USM procedures and formalities. Once they become participating securities, title instruments may no longer be issued for those securities. All eligible prescribed securities that are first listed after the USM is implemented must be in uncertificated form from the time of listing. Investors may hold securities in their own name and in uncertificated form via a facility (the USI facility), which will enable investors to manage their uncertificated holdings directly.

The central nominee structure in CCASS will be retained, such that securities held in CCASS will continue to be registered in the name of HKSCC. The processes for moving securities between accounts within CCASS will remain largely unchanged. The main change will be to the processes for depositing or withdrawing securities into or out of CCASS once they become participating securities, as those processes will be electronic rather than paper-based.

Depositaries of SFC-authorised collective investment schemes

From 2 October 2024 onwards, any depositary (such as a trustee or a custodian) of SFC-authorised collective investment schemes (CISs) will be required to be licensed by or registered with the SFC for Type 13 regulated activity (RA 13) under the SFO, unless the CIS is

1. a registered mandatory provident fund scheme or a constituent fund of such scheme, or
2. an approved pooled investment fund that is not offered to retail investors.[23]

The depositary services covered by this new regime refer to

1. the custody and safekeeping of relevant CIS property, and
2. the oversight of a relevant CIS to ensure that it is operated in accordance with its scheme documents.

The licensing and registration requirements under Part V of the SFO and most of the SFC’s existing licensing publications, including the Fit and Proper Guidelines and the Guidelines on Competence, also apply to depositaries and their representatives. Ongoing requirements include maintenance of minimum paid-up share capital amount and liquidity capital amount, monthly financial returns and record keeping. A new Schedule 11 to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission will set out additional requirements for RA 13 depositaries.



Other strategic considerations

The SFC has set four strategic priorities for 2024 to 2026, namely,

1. maintaining market resilience and mitigating serious harm to the markets,
2. enhancing the global competitiveness and appeal of Hong Kong capital markets,
3. leading financial market transformation through technology and ESG, and
4. enhancing institutional resilience and operational efficiency.[24]

HKEX will continue to capture the opportunities ahead, driven by the ongoing release of Mainland China’s domestic savings pool, the increasing relevance of the Asian economy, the global sustainability agenda and the progress of technology and innovation.[25]

Outlook and conclusions

Market sentiments in the Hong Kong capital markets will remain influenced by macroeconomic and geopolitical factors. It is important for the regulators and participants to collaborate to build a stronger, yet flexible, infrastructure for the city’s capital markets and keep diversifications in order to attract new capital and maintain market reputation.

This material has been prepared for general informational purposes only and is not intended to be relied upon as professional advice. Please contact us for specific advice.

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