CPD Day 2016 Shanghai Stock Connect Margin Financing Richard McKeown Joseph Lee 19 October 2016
Outline Taking security over listed shares Stock Connect - Shanghai (Nov 2014) / Shenzhen (Nov 2016) Common Issues Stamp Duty Registration Securities Margin Financing Disclosure Substantial shareholder 2
Security over Shares Legal -v- Equitable Effectiveness Fluctuations in value Priority of other creditors Illiquidity Restrictions on taking / enforcing security Certificated -v- Dematerialised 3
Dematerialised / Scripless shares - CCASS The Central Clearing and Settlement System Hong Kong Securities Clearing Company Limited HKSCC Nominees Limited CCASS Participants 4
Hong Kong Exchanges and Clearing The Hong Kong Exchanges and Clearing (HKEX) The Stock Exchange of Hong Kong Limited (SEHK) Hong Kong Securities Clearing Company Limited (HKSCC) 5
Shanghai / Shenzhen - Hong Kong Stock Connect The Stock Exchange of Hong Kong Limited (SEHK) Hong Kong Securities Clearing Company Limited (HKSCC) China Securities Depository and Clearing Corporation Limited (ChinaClear) Shanghai Stock Exchange (SSE) Shenzhen Stock Exchange (SZSE) 6
Shanghai Hong Kong Stock Connect ( Shanghai Stock Connect ) 10 April 2014 17 November 2014 16 August 2016 Second half of November 2016 Securities & Futures Commission ( SFC ) and China Securities Regulatory Commission ( CSRC ) approved in principle for the development of Shanghai Stock Connect Launch of Shanghai Stock Connect SFC and CSRC approved in principle for the development of Shenzhen Stock Connect Expected to launch Shenzhen Stock Connect 7
What is Shanghai Stock Connect? A mutual market access programme, through which investors in Hong Kong and Mainland China can trade and settle shares listed on the other market respectively via the exchange and clearing house in their local markethong Kong Securities Clearing Company Limited. For secondary market trading only 8
What is Shanghai Stock Connect? Eligible Investors Northbound Trading Hong Kong and overseas investors Trading in securities listed on the Shanghai Stock Exchange ( SSE ) Southbound Trading Mainland China investors (institutional investors and high net worth individuals holding not less than RMB500,000 in their securities and cash accounts) Trading in securities listed on The Stock Exchange of Hong Kong Limited ( SEHK ) Daily Quota RMB 13 billion RMB 10.5 billion 9
Statistics Northbound Trading 10 Sep 2016 Aug 2016 Jul 2016 Turnover (Buy + Sell Trades) (RMB mil) 60,765.17 69,547.68 57,899.98 Buy Trades (RMB mil) 29,697.65 42,232.35 33,324.24 Sell Trades (RMB mil) 31,067.52 27,315.33 24,575.74 No. of Buy + Sell Trades 2,237,994 2,778,280 2,342,566 No. of Buy Trades 1,102,832 1,682,132 1,353,939 No. of Sell Trades 1,135,162 1,096,148 988,627 Average Daily Turnover (Buy + Sell Trades) (RMB mil) 3,198.16 3,161.26 2,895.00 Average Daily Buy Trades (RMB mil) 1,563.03 1,919.65 1,666.21 Average Daily Sell Trades (RMB mil) 1,635.13 1,241.61 1,228.79 Average Daily No. of Buy + Sell Trades 117,788 126,284 117,127 Average Daily No. of Buy Trades 58,043 76,460 67,696 Average Daily No. of Sell Trades 59,745 49,824 49,431 Source: HKEx
11 Statistics Top 10 Most Actively Traded Stocks (September 2016) Rank Stock Code Stock Name Buy Trades (RMB mil) Sell Trades (RMB mil) Turnover (Buy + Sell Trades) (RMB mil) 1 601318 PING AN INSURANCE 2,905.12 1,848.42 4,753.54 2 600519 KWEICHOW MOUTAI 1,413.25 2,129.63 3,542.88 3 600030 CITIC SECURITIES 415.36 1,604.75 2,020.11 4 600487 HENGTONG OPTIC-ELECTRIC 713.90 667.53 1,381.43 5 601166 INDUSTRIAL BANK 406.19 922.62 1,328.81 6 600036 CHINA MERCHANTS BANK 565.61 649.51 1,215.12 7 601939 CHINA CONSTRUCTION BANK 637.14 561.46 1,198.60 8 600016 CHINA MINSHENG BANKING 411.12 773.97 1,185.09 9 600585 ANHUI CONCH CEMENT 708.92 455.02 1,163.94 10 600104 SAIC MOTOR 684.87 458.00 1,142.87 Source: HKEx
Statistics Southbound Trading 12 Sep 2016 Aug 2016 Jul 2016 Turnover (Buy + Sell Trades) (HKD mil) 127,374.08 90,906.33 57,887.93 Buy Trades (HKD mil) 93,178.28 56,820.08 33,828.67 Sell Trades (HKD mil) 34,195.80 34,086.25 24,059.26 No. of Buy + Sell Trades 1,358,007 1,373,662 1,058,479 No. of Buy Trades 882,254 752,197 603,718 No. of Sell Trades 475,753 621,465 454,761 Average Daily Turnover (Buy + Sell Trades) (HKD mil) 7,960.88 4,132.10 2,894.39 Average Daily Buy Trades (HKD mil) 5,823.64 2,582.73 1,691.43 Average Daily Sell Trades (HKD mil) 2,137.24 1,549.37 1,202.96 Average Daily No. of Buy + Sell Trades 84,874 62,438 52,923 Average Daily No. of Buy Trades (HKD mil) 55,140 34,190 30,185 Average Daily No. of Sell Trades (HKD mil) 29,734 28,248 22,738 Source: HKEx
Statistics Top 10 Most Actively Traded Stocks (September 2016) 13 Rank Stock Code Stock Name Buy Trades (HKD mil) Sell Trades (HKD mil) Turnover (Buy + Sell Trades) (HKD mil) 1 00005 HSBC HOLDINGS 11,972.56 2,912.30 14,884.86 2 01398 ICBC 9,072.01 1,846.29 10,918.30 3 02318 PING AN 5,780.86 2,838.65 8,619.51 4 00939 CCB 6,991.57 1,429.73 8,421.30 5 03988 BANK OF CHINA 6,567.76 1,566.58 8,134.34 6 01288 ABC 4,643.21 965.31 5,608.52 7 00700 TENCENT 4,295.49 944.12 5,239.61 8 00688 CHINA OVERSEAS 3,163.88 56.75 3,220.63 9 01109 CHINA RES LAND 1,909.62 91.62 2,001.24 10 01359 CHINA CINDA 1,465.88 472.35 1,938.23 Source: HKEx
Trading Arrangement Northbound Trading Investors place orders with SEHK Participants Orders input by SEHK Participants will be validated by a new system CSC (China Stock Connect System, for basic order checking and quota control), and then routed to SSE via SEHK Subsidiary For executed trade, SSE will send trade confirmation to SEHK Subsidiary, which will forward the confirmation to SEHK Participants 14
Eligible Securities Index Constituent Stocks Northbound: SSE Securities SSE180 SSE380 Southbound: SEHK Securities HS LargeCap HS MidCap A+H SSE-SEHK A+H SSE-SEHK A+H Excluded Shares on risk alert board A+H on other Mainland exchange Shares that are not traded in RMB Shares that are not traded in HKD H shares which have corresponding A shares put under risk alert 15
Eligible Securities Northbound Trading Southbound Trading Eligible Securities A Shares Equities listed on the Main Board Non-eligible Securities B shares, Exchange Traded Funds ( ETFs )*, bonds and other products Stocks listed on GEM, Nasdaq Pilot Programme stocks, ETFs*, Real Estate Investment Trusts, structured products, bonds and other securities * On 16 August 2016, the SFC and the CSRC have reached a consensus to include ETFs as eligible securities. Launch date is to be confirmed 16
Eligible Securities Northbound Trading Only sell orders are allowed if : the securities cease to be constituent stocks of relevant indices the securities subsequently are placed under risk alert board corresponding H shares of A+H shares cease to be traded on SEHK A share of A+H shares will be accepted as an eligible security if: both A and H shares are simultaneously listed corresponding H shares are subsequently listed on SEHK A shares are subsequently listed on SSE If only the H share of A+H shares is suspended from trading: investors can buy and/or sell the corresponding A share 17
Eligible Securities Southbound Trading Only sell orders are allowed if: the securities cease to be constituent stocks of relevant indices corresponding A shares of A+H shares cease to be traded on SSE or put under risk alert H share issuers list its A share on a Mainland exchange other than SSE H share of A+H shares will be accepted as an eligible security if: both A and H shares are simultaneously listed corresponding A shares are subsequently listed on SSE H shares are subsequently listed on SEHK If only the A share of A+H shares is suspended from trading: investors can buy and/or sell the corresponding H share 18
SEHK listed Issuers: Corporate actions General principle All holders of listed securities should be treated fairly and equally Pre-emptive issues Offer or distribute entitlement securities to mainland investors What if entitlement securities are not eligible securities under Shanghai Stock Connect? sell them on SEHK through Shanghai Stock Connect if they are listed HKSCC and ChinaClear will determine how to deal with the securities if they are not listed provide all shareholders an option to receive their entitlement in cash rather than securities offer a means for the shareholders to dispose of these securities if they are not listed Disclose the arrangement in corporate communications 19
Shareholding Restrictions on SSE Securities Aggregate foreign investors' shareholding in an A share must 30%of the total issued shares When Aggregate Foreign Shareholding reaches 26%, SSE will publish notice When Aggregate Foreign Shareholding exceeds 30%, the foreign investors concerned will be requested to sell the shares on a last-in-first-out basis within five days Foreign investors: QFII, RQFII, investors trading A shares through Shanghai Stock Connect When Aggregate Foreign shareholding reaches 28%, HKEx will stop accepting further buy orders on that A share, until shareholding lowers to 26% If Aggregate Foreign Shareholding exceeds 30%, HKEx will identify the relevant SEHK Participant and require it to follow the forced-sale requirements 20 Single foreign investors' shareholding in an A share must 10% of the total issued shares As HKEx does not have individual investor's shareholding information, SEHK Participants should remind their clients to comply with the rule
Common Issues Stamp Duty Sale or purchase or voluntary disposition of Hong Kong stock Northbound Trades under Stock Connect not HK stock, but SSE securities Exception Transfer for nominal consideration to secure repayment of an advance or loan or under which no beneficial interest passes Enforcement stamp duty payable on transfer 21
Common Issues Registration S 334 Companies Ordinance specified charge uncalled share capital unpaid instalments due on issue price of shares book debts floating charge Consequences of contravention offence by company Charge void against any liquidator and creditor of the company 22
Common Issues Securities Margin Financing regulated activity under Securities and Futures Ordinance Exceptions Prospectus Type 1 licence / registration by authorized institution to facilitate acquisitions by its clients 23
Common Issues Disclosure of interest Part XV of Securities and Futures Ordinance Duty of disclosure of acquisition of (or change in) interest in shares in Listco Notifiable percentage = 5% Specified percentage = 1% Duty to disclose within 3 business days Exceptions Qualified Lender 24
Disclosure of Interests An interest in shares would cease to be an exempt security interest, and would have to be disclosed by both the shareholder and the qualified lender if qualified lender: becomes entitled to exercise voting rights upon a default; and has: evidenced an intention to exercise (or control the exercise of) voting rights; or takes any step to exercise voting rights in respect of shares provided as security; or power of sale has become exercisable and the qualified lender offers the shares for sale 25
Disclosure obligations for SSE Securities If an investor holds up to 5% of the issued share capital of a Mainland listed company, he is required to: Report to CSRC and SSE and inform the listed company within 3 business days Stop trading in that company in those 3 days Change in shareholding reaches 5% Report to CSRC and SSE and inform the listed company within 3 business days No trading is allowed from the day the disclosure obligation arises to 2 working days after the disclosure is made Shareholding failing below 5% Disclose within 3 working days 26
Share mortgage by controlling shareholder Listing Rules Upon listing Lock-up of shares (6 months + 6 months) except in favour of an authorized institution Disclosure undertaking Continuing obligations Mortgage of shares to secure the issuer s debts or secure guarantee or other support Disclosure obligation Inside Information SFC: Mortgage of shares by a controlling shareholder is one of the common examples of which an issuer should consider whether a disclosure obligation arises 27
Inside Information Inside Information means specific information about: the corporation; a shareholder or officer of the corporation; or the listed securities of the corporation or their derivatives, which is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but would if generally known to them be likely to materially affect the price of the listed securities. Insider dealing takes place when a person connected with a listed corporation has information which he knows is inside information and deals in the listed securities of such corporation (or of a related corporation). 28
Common Issues Mandatory Offer 30% of voting shares The Code on Takeovers and Mergers and Share Repurchases Securities and Futures Commission, HK 29
Questions? simmons-simmons.com elexica.com 30
simmons-simmons.com elexica.com This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices. Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the other partnerships and other entities or practices authorised to use the name Simmons & Simmons or one or more of those practices as the context requires. The word partner refers to a member of Simmons & Simmons LLP or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP s affiliated practices. For further information on the international entities and practices, refer to simmonssimmons.com/legalresp. Simmons & Simmons LLP is a limited liability partnership registered in England & Wales with number OC352713 and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority. A list of members and other partners together with their professional qualifications is available for inspection at the above address. Simmons & Simmons LLP 2013. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities. 0 / B_LIVE_EMEA1:1716992v1