FAQ on Beneficial Ownership under SH-HK Stock Connect
1. Do overseas investors enjoy proprietary rights in the SSE Securities acquired through the Northbound Trading Link as shareholders? Are the concepts of "nominee holder" and "beneficial owner" recognized under Mainland law?
Article 18 of the Administrative Measures for Registration and Settlement of Securities (the “Settlement Measures”) states 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 Certain Provisions on Shanghai-Hong Kong Stock Connect Pilot Program (the “CSRC Stock Connect Rules”) states that shares acquired by investors through the Northbound Trading Link shall be registered in the name of HKSCC and that “investors are legally entitled to the rights and benefits of shares acquired through the Northbound Trading Link”. Accordingly, the CSRC Stock Connect Rules have expressly stipulated that, in Northbound trading, overseas investors shall hold SSE Securities through HKSCC and are entitled to proprietary interests in such securities as shareholders.
2. How do overseas investors exercise their rights over the SSE Securities acquired through the Northbound Trading Link and held through Hong Kong Securities Clearing Company Limited (“HKSCC”)?
Under the Stock Connect, the exercise of shareholder rights by overseas investors as beneficial owners of SSE Securities shall be 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 SSE Securities shall exercise their rights over such securities through HKSCC as the nominee holder, covering the following: 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.
3. How do overseas investors bring legal action in the Mainland to realise their rights over the SSE Securities acquired through the Northbound Trading Link?
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. As we understand, HKSCC, as the nominee holder of the SSE Securities in Northbound Trading Link, may exercise shareholder rights and take 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 an overseas investor can provide evidential proof of direct interest as a beneficial owner, the investor may take legal actions in its own name in Mainland courts.
4. Will certification of holdings of the SSE Securities issued by HKSCC be recognized by CSRC?
Article 13 of the CSRC Stock Connect Rules states that “shares acquired by investors through the Northbound Trading Link shall be registered in the name of HKSCC”. Article 3 of the Joint Announcement of China Securities Regulatory Commission and Securities and Futures Commission regarding the Stock Connect states that “trading and clearing arrangements will be subject to the regulations and operational rules of the market where trading and clearing take place”, thus setting out application of rules for trading and clearing under the pilot program. Accordingly, certification of overseas investors as beneficial owners of SSE Securities shall comply with laws and regulations of the HKSAR. As long as certification issued by HKSCC is treated as lawful proof of a beneficial owner’s holding of SSE Securities under HKSAR law, it would be fully respected by CSRC.