LISTING RULES GUIDANCE NOTE 8

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LISTING RULES GUIDANCE NOTE 8 Sydney Stock Exchange Limited ACN 080 399 220 Email: info@ssx.

1 LISTING RULES GUIDANCE NOTE 8 Sydney Stock Exchange Limited ACN info@ssx.sydney George Street, Sydney NSW 2000 Tel: (61-2) Fax: (61-2) Australian Market Licence (Sydney Stock Exchange Limited) 2004

2 TABLE OF CONTENTS OVERVIEW INTRODUCTION DEFINITIONS... 3 EMERGING MARKETS WHAT IS AN EMERGING MARKET APPLICANT? WHAT IS AN EMERGING MARKET? WHAT CHALLENGES ARE BEING ADRESSED?... 4 CHINA VARIABLE INTEREST ENTITIES LISTING RULE LISTING RULE 4.14 REPORTS LISTING RULE DISCLOSURE OF A 4.14 REPORT CONTENT OF A 4.14 REPORT... 7 Ownership of assets... 7 Corporate structures ACCEPTABLE EXPERTS RELATIONSHIP BETWEEN SPONSORS AND EXPERTS... 8 FINANCIAL REPORTING IN A PRESENTATION CURRENCY OTHER THAN AUD WHAT IS A PRESENTATION CURRENCY? WHAT IS FUNCTIONAL CURRENCY? PRESENTATION OF FINANCIAL RESULTS IN ACCORDANCE WITH AASB This document supersedes and replaces any previous issue. Any copies found to be incomplete should not be used. Copyright Sydney Stock Exchange Ltd. All rights reserved. No part of this publication may be reprinted, reproduced, stored in a retrieval system or transmitted, in any form or by any means, without the prior permission in writing from the owners. Page 2 of 10

3 OVERVIEW 1. INTRODUCTION 1.1 This guidance note is published to provide emerging market applicants with guidance about factors which SSX will take into account when considering listing applications by applicants which have a material or substantial part of their assets or business in emerging markets. This guidance note will be updated to address a wider range of issues in due course. 1.2 A number of markets and regulatory bodies have experienced challenges in relation to emerging market issuers. Some of those challenges have had an adverse impact on investors and confidence in the markets. A number of regulatory agencies and other authors have documented and commented upon these challenges. Amongst these are (1) Australian Securities and Investments Commission Report REP 368 Emerging market issuers, ( REP368 ); (2) Ontario Securities Commission OSC Staff Notice Issuer Guide for Companies Operating in Emerging Markets The challenges identified in such reports introduce various risks to the provision of a market for emerging market applicants including, but not limited to, investment and governance risks. 1.4 Nothing in this guidance note binds SSX in relation to the application of the listing rules to a particular applicant or in a particular situation. Nothing in this guidance note is to be taken to be legal advice, and SSX recommends that applicants obtain their own independent legal advice. The views set out in this guidance note are those of SSX and a court may take a different view. SSX reserves the right to withdraw or amend this guidance note at any time without notice. 2. DEFINITIONS 2.1 Terms that are not specifically defined in this guidance note, but are given a particular meaning in the listing rules, have the meaning given in the listing rules. 2.2 Terms and definitions used within this guidance note: 4.14 report means a report prepared by an applicant at the request of SSX in accordance with listing rule Emerging market applicant has the meaning set out in section 3 below. Emerging market has the meaning set out in section 4 below. Guidance Note means this document. Market means the financial market operated by SSX. 1 Available at pdf/$file/rep372-published-17-October-2013.pdf 2 Available at Page 3 of 10

4 SSX means Sydney Stock Exchange Limited. EMERGING MARKETS 3. WHAT IS AN EMERGING MARKET APPLICANT? 3.1 SSX has derived a definition of emerging market applicant from REP 368. That is, an emerging market applicant is one which has: (1) material assets located in an emerging market; (2) material revenue streams derived from operations in an emerging market; (3) material subsidiaries incorporated in and/or listed in an emerging market; (4) a material number of directors or senior management based in an emerging market; or (5) engages an auditor from an emerging market in relation to (1), (2) or (3) above. 4. WHAT IS AN EMERGING MARKET? 4.1 SSX has derived a definition of emerging market based upon REP 368. SSX considers an emerging market to be one within the geographic areas of Eastern Europe, Asia and the Pacific (excluding Singapore, Hong Kong, Japan and New Zealand), Africa (excluding South Africa), South America or the Middle East. 5. WHAT CHALLENGES ARE BEING ADRESSED? 5.1 In REP 368 a number of specific challenges in relation to emerging market issuers were identified. These included: (1) implementing good corporate governance in light of a geographically scattered board with limited financial resources; (2) implementing effective internal controls and risk management systems where operations are geographically diverse; (3) operating through complex ownership or contractual arrangements in response to laws in some jurisdictions that limit the ownership of assets by foreign entities; (4) relying on one or two key individuals located outside Australia, which raises the risk of substantial transactions benefiting those individuals; and (5) a company or its auditor verifying information or opinions about the entity s operations and performance provided by experts or professionals in an overseas jurisdiction. 5.2 Similarly, OSC Staff Notice identified a number of similar challenges in relation to emerging market issuers: Page 4 of 10

5 (1) Business and operating environment ; (2) Language and cultural differences; (3) Corporate structure; (4) Related parties; (5) Risk management and disclosure; (6) Internal controls; (7) Use of and reliance on experts; and (8) Oversight of the external auditor. 5.3 These are not exhaustive lists. Emerging market applicants and emerging market issuers face a range of challenges depending upon their particular circumstances. Those challenges can result in an expectations gap between the standards and practices in the emerging market and the standards and expectations in the Australian market. The Board of the applicant will need to consider those challenges and expectations. SSX will consider the particular circumstances of each emerging market applicant on a case by case basis. CHINA 6. VARIABLE INTEREST ENTITIES LISTING RULE The variable interest entity ( VIE ) structure is typically adopted by companies in the People s Republic of China ( PRC ) operating in industries subject to PRC Government restrictions on foreign investment that are seeking to list on foreign markets (for example: education, research, e-commerce, telecommunications, etc.). 6.2 The traditional structure for listing a Chinese entity involves an offshore entity acquiring 100% of the equity in the domestic Chinese operating company from the Chinese vendors. That offshore entity (or a holding company of that offshore entity) would then list on SSX. 6.3 In the case of a VIE structure, the offshore holding company would form a new wholly owned subsidiary ( WOFE ) in China which controls the domestic PRC operating company and receives the economic benefits of the domestic PRC operating company through contractual arrangements rather than equity ownership. The majority equity ownership would normally reside with the Chinese vendors. The Chinese vendors would normally retain licences and assets which are restricted from being transferred to the WOFE due to the Government restrictions on foreign investment. The contractual arrangements allow the listed offshore entity to consolidate the WOFE in its financial accounts. 6.4 The adoption of VIE structures currently introduces a number of risks for investors. These include (but are not limited to) the risk of the VIE structure being declared invalid in China 3 ; the risk that the 3 On 19 January 2015, the Ministry of Commerce released the discussion draft of the Law of the People's Republic of China (PRC) on Foreign Investments ("Draft Law"). Under the Draft Law all foreign invested Page 5 of 10

6 contractual relationships between the vendors and the WOFE may be unenforceable; and the risk of taxation challenges in China. 6.5 Listing Rule 4.18 requires that an applicant's structure and operations must be appropriate for a listee. 6.6 SSX is of the view that until the PRC government provides greater clarification on the treatment and validity of VIE structures, the VIE structure is not an appropriate structure for a listee on the SSX market 4. Accordingly, VIE structures will not satisfy the requirements of listing rule In the event that SSX has concerns in relation to an emerging market applicant or listee which may be a potential VIE structure, SSX may require the emerging market applicant to provide a report in accordance with listing rule LISTING RULE 4.14 REPORTS 7. LISTING RULE Listing Rule 4.14 provides that SSX may seek additional information from an emerging market applicant, or any other person, including the relevant sponsor, in relation to the application for admission. SSX may submit, or require the emerging market applicant to submit, any information given to SSX to the scrutiny of an expert selected by SSX. The emerging market applicant must pay for the expert. 7.2 When referring matters to the scrutiny of an expert, SSX would ordinarily require the expert to provide a written report to the applicant and SSX (a 4.14 report ). 8. DISCLOSURE OF A 4.14 REPORT 8.1 A 4.14 report must be finalised and submitted to SSX prior to SSX forming a view on whether or not to admit the emerging market applicant to the Official List. 8.2 If SSX approves the emerging market applicant being admitted to the Official List then the 4.14 report may, as a condition of admission under listing rule 4.5, be disclosed to the market prior to the commencement of Official Quotation as pre-quotation disclosure. 8.3 SSX will not comment on the contents of the report prior to disclosure to the market. entities (FIEs) must convert their organization forms and structures in accordance with the PRC Law within three years (e.g. by becoming a Limited Liability Company). A company with a VIE structure in an industry that is on the negative list, may be deemed legitimate if the ultimate controllers are either PRC entities or PRC citizens, but if the actual controllers are foreign, then the company will require market entry clearance. Article 149 specifies that any investment in either prohibited industries or in restricted industries without entry clearance using a means of circumvention such as VIEs and offshore transactions, will subject the investor or foreign-invested enterprises to administrative or criminal penalties. It is unclear whether the Foreign Investment Law will have a grandfather clause that exempts such existing VIE structure from the new law. 4 See also ASIC Market Integrity Update No 65, October 2015, available at asic/corporate-publications/newsletters/market-integrity-update/market-integrity-update-issue-65-october- 2015/#ipos-of-vies Page 6 of 10

7 9. CONTENT OF A 4.14 REPORT 9.1 Issues SSX may require to be addressed in a 4.14 report include (but are not limited to): (1) ownership of assets; and (2) corporate structures. Ownership of assets 9.2 Issues which SSX may require to be addressed in relation to ownership of assets include, for example (1) The extent to which physical assets were sighted and validated; (2) The validity of legal title to primary operating assets; (3) Differences in ownership structures and certainty of title between jurisdictions; (4) The validity of permits or licences to operate in the primary jurisdictions in which the emerging market applicant operates. Corporate structures 9.3 Issues which SSX may require to be addressed in relation to corporate structures include, for example, the nature of the corporate structures adopted in the primary jurisdictions in which the applicant operates, in particular; (1) Whether the structure requires the legal ownership of the applicant s assets to be vested in a non-affiliated third party or established through indirect contractual relationships; (2) Whether the structure limits or inhibits the ability of shareholders to have recourse against the assets of the applicant; (3) Whether the structure limits or inhibits the ability of the Board to properly govern and oversee the management operations of the asset; (4) The extent to which the structure limits or inhibits the ability of the Board to minimise the risk of fraudulent activity; (5) Disclosure of the risks associated with the differing structures adopted. 10. ACCEPTABLE EXPERTS 10.1 An emerging market applicant must consult with SSX prior to the appointment of an expert. The appointed expert must be independent of the applicant To qualify as an expert to which SSX will not object, the expert must satisfy the following criteria: Page 7 of 10

8 (1) Have had a presence in the relevant emerging market(s) of the emerging market applicant for at least 5 years (or have partnership arrangements with an expert which has had a presence in the relevant emerging market(s) of the emerging market applicant for at least 5 years); (2) Have at least 10 full time employees in the relevant emerging market(s) of the emerging market applicant (or have partnership arrangements with an expert which has at least 10 full time employees in the relevant emerging market(s)); (3) Have had a presence in Australia for at least 5 years; and (4) Have at least 10 full time employees in Australia. 11. RELATIONSHIP BETWEEN SPONSORS AND EXPERTS 11.1 The sponsor of the emerging market applicant may prepare the 4.14 report if it is an expert not objected to by SSX, is independent of the emerging market applicant and satisfies the qualification requirements set out in paragraph 10.2 above. If the sponsor does not meet the requirements in paragraph 10.2 then the emerging market applicant will be required to engage an expert which does satisfy the qualification requirements set out in paragraph 10.2 to prepare the 4.14 report. FINANCIAL REPORTING IN A PRESENTATION CURRENCY OTHER THAN AUD 12. FINANCIAL REPORTING OBLIGATIONS 12.1 A listee on Sydney Stock Exchange has mandatory periodic financial reporting obligations under both the Act and Listing Rules. The policy objective is to ensure the fundamental information relating to the listee s financial position and business operations is disclosed accurately and in a timely manner. This enables the market to assess the value of the listee s securities, the operations of the listee, and to provide the market an opportunity to examine the business operations of the company. Overall, it is a mechanism designed to promote the fairness, transparency and effectiveness of the market There are certain overlapping financial reporting obligations imposed by the Act and the Listing Rules. The periodic financial reporting requirements in the Listing Rules are supplemented by and in addition to those prescribed by the Act. The financial reporting requirements under the Act have two parts, the preparation and lodgement of annual and half year reports with ASIC and the provision of annual reports to shareholders The relevant provisions in the Act 5 are as follows: (1) Division 1 of the Part 2M.3 Annual Financial Reports and Directors Reports (required to be lodged with ASIC) (2) Division 2 of the Part 2M.3 Half Year Financial Reports and Directors Reports (required to be lodged with ASIC) 5 Part 2M.3 also applies to managed investment schemes to the extent they are registered schemes or disclosing entities as defined by the Act. Page 8 of 10

9 (3) Division 4 Annual Financial Reporting to Members (dispatched or made available to its members) 12.4 In addition to the requirements set out in the Act, listees are also bound by the periodic financial reporting obligations in Listing Rules, including: (1) Rules : Quarterly Cash Reports (applicable to certain listees); (2) Rules : Half Year Report and Half Year Financial Statements; (3) Rules : Full Year Indicative Financial Report, Annual Report and Financial Statements Financial Statements must be prepared in accordance with accounting standards as set out in Listing Rule It is particularly important to note that the periodic financial reporting obligations should not be considered as a substitute for the listee s continuous disclosure obligation pursuant to Listing Rule WHAT IS A PRESENTATION CURRENCY? 13.1 A number of Australian incorporated listees on the Sydney Stock Exchange market derive significant revenues from, or conduct significant operations in, countries other than Australia. This may particularly apply to emerging market listees. For listees of this type, if accounts are presented in AUD, there is potential for significant variations in reported financial results between reporting periods due to currency fluctuations which may lead to the reported financial results representing a less than accurate reflection of the true operational results of the listee Australian Accounting Standard AASB 121 states that a listee may present its financial statements in any currency (or currencies) 6. AASB 121 defines the presentation currency as the currency in which the financial statements are presented. 14. WHAT IS FUNCTIONAL CURRENCY? 14.1 Functional currency, as defined in AASB 121, is the currency of the primary economic environment in which the listee operates For a number of Australian incorporated listees on the Sydney Stock Exchange market deriving significant revenues from, or conducting significant operations in, countries other than Australia, the primary functional currency may not be AUD. 15. PRESENTATION OF FINANCIAL RESULTS IN ACCORDANCE WITH AASB Allowing an Australian incorporated listee to report in a presentation currency other than AUD and which is also its functional currency reduces potential variations in reported financial results arising from 6 AASB 121 Clause 38 Page 9 of 10

10 currency fluctuations, thereby potentially presenting a more accurate reflection of the true operational results of the listee For example, a listee may experience a profit decline in its functional currency of less than 15% from the previous corresponding period but, when reported in AUD, the profit decline may exceed 15% as a result of currency fluctuations from the previous corresponding period. This may present challenges for the listee as, in the absence of any detailed explanation, it may appear the listee is in breach of its continuous disclosure obligations to provide guidance to the market in relation to significant fluctuations (refer to Guidance Note 3 Continuous Disclosure) A number of Australian incorporated listees on the Sydney Stock Exchange market have their primary economic environment in China. Notwithstanding that the listee may be incorporated in Australia, such listees may choose to present their financial results in RMB rather than AUD on the basis that their functional currency is RMB. Conversely, the listee may choose to present its financial results in AUD notwithstanding that its functional currency is RMB. This is a matter of choice for the listee An Australian incorporated listee disclosing its financial results in a presentation currency other than AUD (or other than its functional currency) must comply with Australian Accounting Standard AASB As set out in AASB 121, a listee s functional currency reflects the underlying transactions, events and conditions that are relevant to it. Accordingly, once determined, the functional currency is not changed unless there is a change in those underlying transactions, events and conditions As also set out in AASB 121 and of particular relevance to emerging market listees, if the functional currency is the currency of a hyperinflationary economy, the listee s financial results are to be restated in accordance with AASB 129 Financial Reporting in Hyperinflationary Economies. A listee cannot avoid restatement in accordance with AASB 129 by, for example, adopting as its functional currency a currency other than the functional currency determined in accordance with AASB If an Australian incorporated listee chooses to disclose its financial results in a presentation currency other than AUD, that listee must also disclose that fact and set out the rationale for reporting in that currency. It must set out that it is reporting in accordance with AASB Australian incorporated listees should consult with their auditors when considering the use of a presentation currency other than AUD or other than their functional currency. Page 10 of 10

SYDNEY STOCK EXCHANGE BRIDGING ASIAN & AUSTRALIAN CAPITAL MARKETS

SYDNEY STOCK EXCHANGE BRIDGING ASIAN & AUSTRALIAN CAPITAL MARKETS Sydney Stock Exchange Limited ACN 080 399 220 Tel: (61-2) 9217 2730 Fax: (61-2) 9215 2833 Email: info@ssx.sydney Website: www.ssx.sydney