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Q&A regarding Certain Provisions on Stock Connect between the Mainland and Hong Kong Stock Markets
27-10-2016

 

1. Q: In addition to Certain Provisions on Stock Connect between the Mainland and Hong Kong Stock Markets announced by the CSRC, are there going to be other relevant documents?


A: In order to facilitate the implementation of Certain Provisions on Stock Connect between the Mainland and Hong Kong Stock Markets (hereinafter referred to as the "Provisions"), the CSRC will publish the Provisions on the Recordation of the Placement of Shares to Existing Mainland Shareholders by Hong Kong-Listed Companies under the Southbound Trading Links, the Rules for the Shareholders' Meetings of Listed Companies, the Guidance on Listed Companies' Articles of Association, the Guidance on Participating in the Stock Connect between the Mainland and Hong Kong Stock Markets by Securities and Fund Management Institutions and other announcements, which will specify the requirements on rights issues to existing mainland shareholders by Hong Kong-listed companies under the Southbound Trading Links, voting rights of securities depository and clearing institutions as nominee holders at shareholders' meetings of listed companies, and participation of Mainland securities and fund management institutions in the [Stock Connect], etc..


Shenzhen Stock Exchange ("SZSE"), Shanghai Stock Exchange ("SSE"), and China Securities Depository and Clearing Corporation Limited ("CSDC") will simultaneously release new or revised rules, including Implementation Measures of the Shenzhen Stock Exchange for Shenzhen-Hong Kong Stock Connect, Implementation Measures of the Shanghai Stock Exchange for Shanghai-Hong Kong Stock Connect, and Implementation Rules for Registration, Depository and Clearing Services under Stock Connect Between the Mainland and Hong Kong Stock Markets and other relevant rules.


Going forward, the CSRC will formulate other relevant documents together with the competent authorities, such as a Joint Announcement by the People's Bank of China and the China Securities Regulatory Commission regarding the Stock Connect between the Mainland and Hong Kong Stock Markets. We hope that all market participants are well prepared in every aspect to ensure smooth implementation and operation of the [Stock Connect].


2. Q: Do overseas investors enjoy proprietary rights as shareholders in the securities acquired through Northbound Trading Links under Shanghai Stock Connect and Shenzhen Stock Connect ("Connect Securities") held through Hong Kong Securities Clearing Company Limited ("HKSCC")? Are the concepts of "nominee holder" and "beneficial ownership" recognized under Mainland laws and regulations?


A: Article 18 of the Administrative Measures for Registration and Settlement of Securities (the "Settlement Measures") stipulates 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. Article 13 of the Provisions states that, among others, "investors are entitled to the rights and interests of the securities acquired through the Northbound Trading Links of the Stock Connect between the Mainland and Hong Kong Stock Markets. ... Securities acquired through the Northbound Trading Links shall be registered in the name of HKSCC. ...". Hence, it has been set out explicitly that in Northbound Trading, overseas investors shall hold Connect Securities in the name of HKSCC and enjoy the proprietary interests as shareholders.


3. Q: How do overseas investors exercise their rights over Connect Securities held through HKSCC?


A: Under the Stock Connect, the overseas investors as beneficial owners of Connect Securities shall exercise their shareholder rights in accordance with the laws and regulations of the Hong Kong Special Administrative Region ("HKSAR") regarding nominee holders. Pursuant to the CCASS Rules and the CCASS Operational Procedures issued by HKSCC, beneficial owners of Connect Securities shall exercise their rights over Connect Securities through HKSCC, which is the nominee holder, covering the right to call and participate in shareholders' meetings, the right to propose matters for voting at shareholders' meetings, the right to exercise voting rights at shareholders' meetings and the right to receive dividends and the distribution of earnings from investment, etc.


4. Q: How can overseas investors pursue legal actions or file lawsuits in the Mainland in order to exercise their rights over the Connect Securities?


A: Mainland law does not expressly provide for a beneficial owner under the nominee holding structure to bring legal proceedings, nor does it prohibit a beneficial owner from doing so. In our understanding, under the Stock Connect, HKSCC, as the nominee holder and registered holder of securities acquired by overseas investors through the Northbound Trading Links, may exercise shareholders' rights and pursue legal actions on behalf of overseas investors. In addition, Article 119 of the Civil Procedure Law of the People's Republic of China states that "the claimant in a legal action shall be an individual, legal person, or any other organization that has a direct interest in the relevant case; ...". As long as the overseas investor can provide evidential proof of its beneficial ownership and direct stakeholdership, the investor may take legal actions in its own name in Mainland courts.


5. Q: Does the CSRC recognize the certification of holdings of Connect Securities issued by HKSCC and its participants?


A: Article 3 of the Provisions provides that "the Stock Connect between the Mainland and Hong Kong Stock Markets shall follow the existing laws and regulations governing trading and clearing in the two regions...", confirming the principle that trading and clearing under the Stock Connect shall follow the laws and regulations of the market where trading and clearing take place. Article 13 of the Provisions states that "... investors shall register the securities acquired through the Northbound Trading Links in the name of HKSCC. ...". Accordingly, certification of overseas investors as beneficial owners of the Connect Securities shall comply with laws and regulations in the HKSAR. As long as the certification of holdings issued by HKSCC and its participants for the Connect Securities is treated as lawful proof of a beneficial owner's holding of the Connect Securities under HKSAR law, it would be fully respected by CSRC.

 

6. Q: As the Stock Connect operates under a nominee holding structure, how are the top 10 shareholders defined and disclosed? Is it based on the shares held by nominee holders or actual beneficial owners?


A: According to the Standards for Contents and Formats of Information Disclosure by Companies Offering Securities to the Public No. 2 - Contents and Formats of Annual Reports (2015 Revision), annual report shall disclose the total number of shareholders as of the end of the reporting period and names of shareholders holding more than 5% shares. If there are less than 10 shareholders holding over 5% shares, names of no less than 10 largest shareholders shall be disclosed. At present, A-share market identifies shareholders based on the register of shareholders documented at the depository and clearing institutions. In other words, it is based on nominee holders. Under the Stock Connect, the disclosure of the top 10 shareholders will be based on the register of nominee holders. It is a key arrangement to ensure market efficiency.

 

7. Q: In relation to the disclosure of share ownership above 5%, controlling shareholders and actual controllers, does the term "shareholders" refer to actual beneficial owners or nominee holders? Who is obligated to disclose information regarding changes in shareholders' equity? Will related equities be aggregated? 


A: Pursuant to Article 67 of the Securities Law, a listed company shall report and release an ad hoc report on any "material change in any shareholder holding over 5% shares or the actual controller of such listed company". Pursuant to the Measures for the Administration of Acquisition of Listed Companies, equities held by an investor in a listed company refer to both shares registered in his name and those not registered in his name but whose attached voting rights are actually possessed by him. Equities held by investor and other persons acting in concert with such investor in a listed company shall be aggregated. Shareholders holding over 5% shares, controlling shareholders or actual controllers shall fulfill their equity disclosure obligations in accordance with aforementioned stipulations.
Pursuant to paragraph 4 of Article 13 of the Provisions, when reaching the threshold that triggers the information disclosure requirement in connection with Northbound trading entered into through the Shanghai Connect and Shenzhen Connect, the Hong Kong investors shall fulfill reporting and information disclosure obligations in accordance with the law. Therefore, Hong Kong investors who purchase, through the Shanghai Connect and Shenzhen Connect, stocks of companies listed on a Mainland market are obliged to disclose relevant information.

 

8. Q: Pursuant to relevant rules of the Provisions, one overseas investor is allowed to hold a maximum of 10% shares of a single listed company. Are the calculation and determination of the maximum percentage of shares allowed to be held based on the shares held by nominee holders or actual beneficial owners? Will stocks listed in Mainland and overseas markets be aggregated?


A: Pursuant to the Measures for the Administration of Acquisition of Listed Companies, "equities of a listed company held by an investor and persons acting in concert with such investor shall be aggregated". The "acting in concert" in the Measures refers to "the act or fact where an investor, through agreements or other arrangements, act together with other investors to jointly increase the number of voting rights they possess in a listed company." "Investors who act in concert in the acquisition of a listed company and the resulting change in equity shares constitute persons acting in concert".


According to the Measures for the Administration of Securities Investment in Mainland by Qualified Foreign Institutional Investors, a QFII shall, in performing its obligation of information disclosure, aggregate the number of shares held by such investor in a listed company listed in Mainland and overseas markets. When applying for QFII status, overseas investors shall fulfill relevant requirements which mandate the disclosure of shareholding information and prohibit short-swing trading. Shares held by a QFII and other persons acting in concert with it in a listed company shall be aggregated, and shares in a listed company held across different products by a QFII shall also be aggregated.


Under the Stock Connect, overseas investors shall effectively fulfill information disclosure obligations in accordance with the aforementioned stipulations.

 

9. Q: How shall an asset management firm or a group with multiple subsidiaries fulfill their equity disclosure obligations? Shall shares held by such subsidiaries in a listed company be aggregated?


A: Pursuant to the Measures for the Administration of Acquisition of Listed Companies, equities held by an investor in a listed company include both shares registered in his name and those not registered in his name but whose attached voting rights are actually possessed by him. Equities held by investor and other persons acting in concert with such investor in a listed company shall be aggregated. Under the Stock Connect, asset management firms or corporate groups shall fulfill equity disclosure obligations in accordance with the aforementioned stipulations.



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