The Stock Exchange of Hong Kong Limited (“HKEX”) published a consultation paper titled ‘Review of Listing Rules Relating to Disciplinary Powers and Sanctions’ (the “Consultation Paper”) in August 2020, which proposed changes in respect of HKEX’s disciplinary regime. The Consultation Paper follows a wide-ranging review of the HKEX’s disciplinary powers and sanctions under Chapter 2A of the Listing Rules, to ensure that the disciplinary regime continues to remain robust and effective. The consultation period had ended on 9 October 2020.
 
The key enhancements to the existing disciplinary regime are set out below. 
<ol>
<li>Lowering existing thresholds for public statements regarding individuals Currently, the HKEX’s power to issue a public statement to the effect that a director continuing to remain in office is prejudicial to the interests of investors (“PII Statement”) can only be exercised where there has been a wilful or persistent failure by the director to discharge his responsibilities under the Listing Rules. The HKEX is proposing to remove this threshold as it is difficult in determining whether an action is wilful. This amendment will provide greater flexibility to the HKEX in being able to issue PII Statements against directors where warranted, without the need to prove that the director’s conduct is wilful or persistent. </li>
<li> Enhancing follow-on actions in relation to public statements regarding individuals and publication requirements Currently, the follow-on actions which the HKEX may direct where an individual subject to a PII Statement remains in office as a director are limited to suspension or cancellation of listing of the issuer’s securities or any class of its securities. In order to bring the compliance attitudes and cultures within listed issuers into sharp focus for the purpose of benefitting the investing public, the following enhancements are proposed in case of serious misconduct: (a) The follow-on actions which the Listing Committee or the Listing Review Committee may direct include the denial of facilities of the market to that listed issuer for a specified period; and (b) The follow-on actions apply where an individual subject to a PII Statement continues to be a director or senior management member of the specified listed issuer. The HKEX also proposes that, after a PII Statement with follow-on actions has been made against an individual, the listed issuer identified in the statement must include a reference to the PII Statement in all of its announcements and corporate communications, unless and until that individual is no longer a director or a senior management member of the relevant listed issuer. </li>
<li>Introducing director unsuitability statements For more serious cases of misconduct where there is a evident or repeated failure by a director to discharge his responsibilities, the HKEX is proposing a new sanction, which would enable it to issue a public statement that, in its opinion, the director is unsuitable to occupy a position as a director or within the senior management of a named listed issuer or any of its subsidiaries. </li>
<li>Introducing secondary liability The HKEX is also proposing to introduce secondary liability for Listing Rule breaches in circumstances where it determines the person “has caused by action or omission or knowingly participated in a contravention of the Listing Rules”. These persons may include directors and senior management, substantial shareholders, professional advisers and their employees, authorised representatives, supervisors and a guarantor of an issuer in the case of a guaranteed issue of debt securities or structured products. Set out below are some examples of how secondary liability would be applied: (a) Chief Financial Officers for failure to obtain auditors’ agreement before publication and material inaccuracy of preliminary results announcement; (b) Chief Operating Officers for failure to disclose share charge in a timely manner and in its interim report; (c) Company Secretaries for material inaccuracy of listed issuer’s announcement of controlling shareholder’s transfer of shares; (d) Substantial Shareholders for breach of maintain minimum public float; (e) Financial Advisers for material inaccuracy of listed issuer’s Circular.</li>
</ol>
 
We believe the proposed enhancements could further enable the HKEX to take timely and effective disciplinary actions, which in turn promote market quality and maintain the integrity of the Hong Kong capital market.

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HKEX Consultation Paper on ‘Review of Listing Rules Relating to Disciplinary Powers and Sanctions’

The Cayman Islands Government introduced the <a href="https://www.cima.ky/upimages/commonfiles/PrivateFundsLaw2020_1581524961.PDF" target="_blank" rel="noopener">Private Funds Law, 2020</a> and the <a href="https://www.cima.ky/upimages/commonfiles/PrivateFundsSavingsandTransitionalProvisionsRegulations2020_1581526431.PDF" target="_blank" rel="noopener">Private Funds (Savings and Transitional Provisions) Regulations, 2020</a> (together as the “New Cayman Law”) in February 2020. One of the key highlights of the New Cayman Law is the mandatory enhancements over the independency and consistency of the valuation process in relation to the assets of private funds.
 
The operator of the private funds shall be responsible for compliance with the New Cayman Law.
 
Effective Period of the New Cayman Law 
 
A transitional period of 6 months was granted, implying that the private funds should be fully aware of the latest code arrangements and have prepared adequate compliance mechanisms in order to comply with the New Cayman Law by no later than 7th August 2020. The degree of compliance to the New Cayman Law will most probably be assessed from the financial year of 2020 onwards.
 
 Valuation Requirements under the New Cayman Law 
 
Under the New Cayman Law, private funds, which cover the majority of the closed-ended funds, are obligated to follow proper and consistent procedures to perform valuations on its assets.
 
In any case, the valuation of assets is required to be conducted at least annually. It shall be carried out at a rate that is appropriate and necessary to timely reflect the material changes on the fair value of the subject asset.
 
The Cayman Law explicitly stated that the appraisal should be performed by one of the followings:
 
<ol style="list-style-type: lower-roman;">
<li>An independent third party that is professionally qualified to conduct valuations in a non-high-risk jurisdiction; </li>
<li>The manager or operator of the private funds provided that: (a) The valuation function is independent from the management function of the funds; or (b) Potential conflicts of interest are appropriately addressed and disclosed to the investors of the private funds; </li>
<li>An administrator appointed by the private funds.</li>
</ol>
 
How AVISTA Can Help
 
One of the key takeaways of the New Cayman Law is the great emphasis on the independence and professoinalism of the valuation of assets, in order to provide the investors with a true and fair view of the value of the funds. Privates funds are required to conduct valuation of the assets at least annually with a rigorous and consistent approach in accordance with the rules and guidelines set forth in the Monetary Authority Law (2020 Revision).
 
As one of the leading independent professional valuation firms, AVISTA is experienced in valuing different types of equity investments and financial instruments with complex structure for financial reporting purpose. Our valuation experts are ready to advise you on how the assets in the funds can be valued for compiling your upcoming audited accounts under the new requirements in a cost effective manner.
 
For further information or enquiries regarding the potential valuation impact of the New Cayman Law to you, please feel free to contact us.

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The New Cayman Law Imposed Further Valuation Requirements for Cayman Private Funds 

The spreading of pandemic remains unpredictable, which continues to dampen investment activities and lead to office size decreasing and office downgrading, etc. In this publication, AVISTA Property Consultancy has covered the outlook of the Hong Kong office market, our insights on the market with reference to selected local offices’ sale and leasing transactions in Q2 2020 as well as our thoughts on the relaxation of mortgage loans on non-residential properties by HKMA and commercial land supply in 2020-2021.
 
Please click <a href="../../../../../uploads/AVISTA_HK_Office_Market_Insights_-_The_Office_market_is_likely_to_remain_under_pressure_EN_v3_ac05b413c0.pdf" target="_blank" rel="noopener">here</a> to read the insights.
 
<a href="../../../../../uploads/AVISTA_HK_Office_Market_Insights_-_The_Office_market_is_likely_to_remain_under_pressure_EN_v3_ac05b413c0.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/eng_cover_1_3802422a17.png" width="600" height="848" /></a>

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The Office Market is Likely to Remain under Pressure—AVISTA HK Office Market Insights (Aug 2020) 

The Stock Exchange of Hong Kong Limited (“HKEX”) has recently published an updated Guidance Letter HKEX-GL86-16 for IPO applicants (“Guidance Letter”) which emphasizes the board of directors of an IPO applicant should ensure necessary corporate governance (CG) and environmental, social and governance (ESG) mechanisms are built into the listing processes in order to promote sustainability, good corporate governance, and diversity. According to the 3.7(a) &amp; (b) under E. “Business” section of updated IPO Guidance, IPO applicants are required to :
 
<ol style="list-style-type: lower-roman;">
<li>put in place relevant mechanisms that enable them to meet the Exchange’s requirements on CG and ESG well in advance so that they are in compliance upon listing. The board of directors of an applicant is collectively responsible for its management and operations (including the establishment of such mechanisms); and </li>
<li>appoint directors (including independent non-executive directors) as early as possible so that directors can engage in the formulation of the necessary mechanisms and related policies on CG and ESG.</li>
</ol>
 
Further to the amendment to the Guidance Letter made in May 2019 to require additional disclosure on (i) ESG matters (including material information on applicants’ environmental policies, and details of the process used to identify, evaluate and manage significant ESG risks) and (ii) gender diversity of the board in the listing documents of new applicants, HKEX has taken this as an extra step to strengthen the disclosure obligation of ESG information by IPO applicants. It is a prerequisite for listing applicants to get braced for ESG mechanisms and relevant disclosure in spite of the fact HKEX does not make ESG report as a mandatory disclosure requirement in the listing document for the time being.
 
It is advisable for pre-IPO companies to establish good corporate governance and enhance board’s oversight of ESG matters including identification and control of material ESG risks in advance not only to cope with the potential queries raised by HKEX but also to echo with the call for ESG information by institutional investors upon their decision-making process.
 
 
Click <a href="https://en-rules.hkex.com.hk/node/5041" target="_blank" rel="noopener">here</a> to read the updated Guidance Letter HKEX-GL86-16 for IPO applicants.

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HKEX Requires Additional Disclosure on CG and ESG Matters by IPO Applicants

The International Accounting Standards Board (“IASB”) has published the Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment in March 2020 (the “Discussion Paper”). The Discussion Paper considers four major topics, including (1) improving disclosures about acquisitions, (2) improving effectiveness of impairment test, (3) simplifying the impairment test, and (4) changing the range of recognisable intangible assets. As an experienced valuation and financial advisory firm, AVISTA has outlined the key points in the Discussion Paper and potential impacts to valuation and corporate transactions.
 
Improving disclosures about acquisitions
 
In response to some investors’ concern on not having sufficient information for understanding the subsequent performance of an acquisition and achievement of the management’s objectives for the acquisition, the IASB believes that companies should disclose the strategic rationale and management’s objective for undertaking an acquisition, and the metrics for monitoring achievement of objectives at acquisition date. Subsequent to the acquisition date, disclosure regarding the information and metrics used by the management to monitor and measure the progress of objectives achievement should be required. The metrics to be disclosed could be financial (e.g. profitability) and/or non-financial (e.g. product launches).
 
Another suggested additional disclosure is the factors making up goodwill, such as nature, amount, and timing of, and related costs required for the synergies expected to be realised. The company is required to provide qualitative description of factors that make up the goodwill recognised and to quantify an estimate of expected synergies in determining and agreeing the acquisition price.
 
Improving effectiveness of impairment test
 
Under the current IAS 36 — Impairment of Assets requirement, companies have to test cash-generating units containing goodwill for impairment at least annually. The Discussion Paper has examined (1) ways to improve the effectiveness of impairment test at a reasonable cost; and (2) whether to reintroduce amortisation of goodwill.
 
Regarding the improvement on the effectiveness of impairment test at a reasonable cost, the Discussion Paper has preliminary concluded that it is not feasible to design a significantly more effective impairment test than the currently adopted one as required in IAS 36 — Impairment of Assets.
 
In the context of reintroducing amortisation of goodwill, the views among IASB members are controversial, with majority of them voting in favour of retaining the impairment-only model and not reintroducing amortisation of goodwill, as the determination of useful life of goodwill would be arbitrary and amortisation of goodwill could not be an effective measure of management’s accountability for acquisition decisions.
 
Simplifying the impairment test 
 
There are three reliefs proposed by the IASB to simplify the impairment test, including (1) removing the requirements for a company to perform annual impairment assessment for cash-generating units containing goodwill if there is no impairment indication, intangible assets with indefinite useful lives and intangible assets not yet available for use; (2) removing the restriction on including uncommitted restructuring and asset enhancement cash flows; and (3) removing the requirement to use pre-tax cash flows and pre-tax discount rates in estimating value in use.
 
The IASB is in the preliminary view that these measures could reduce the cost and complexity for performing impairment test.
 
Changing the range of recognisable intangible assets
 
The Discussion Paper has examined whether some intangible assets could be included in goodwill to reduce costs and complexity for companies in identifying and valuing particular intangible assets. Having considered varying views from stakeholders on this topic, the IASB concluded that there is no compelling evidence suggesting that a change in the range of recognisable intangible assets is favourable.
 
To read the full Discussion Paper released by IASB, please click <a href="https://cdn.ifrs.org/-/media/project/goodwill-and-impairment/goodwill-and-impairment-dp-march-2020.pdf">here</a>.
 
 
AVISTA’s Professional Services for Valuation and Corporate Transactions
 
AVISTA provides one-stop valuation and financial advisory services that help clients achieve additional growth and ensure their compliance with regulators’ stringent rules and disclosure requirements when implementing business decisions and strategies. 
 
<ul>
<li>Valuation Services for Transactions</li>
<li>Valuation Services for Financial Reporting</li>
</ul>
 
We are closely following up on the latest development of this accounting standard update. For further information or enquiry regarding the potential valuation impact of the Discussion Paper to you, please feel free to contact us.

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IASB Discussion Paper on  Business Combinations — Disclosures, Goodwill and Impairment

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Newly-Released ESG Guide Consultation Conclusions and ESG Disclosure Review by HKEX

The Hong Kong SAR government has recently released a new round of economic data, predicting that Hong Kong's Gross Domestic Product (GDP) will contract by 3% in the Q4 of 2019 and contract by 1.3% for the whole year, and lowering Hong Kong's GDP growth forecast for 2020 to 0.7%.
 
It can be seen that there is an uncertainty in Hong Kong's economic prospects and hence some investors have stepped up their efforts to transfer funds to other countries and regions, including Southeast Asian countries. These countries are the members of the Belt and Road Initiative (BRI) that China has been actively promoting since 2013. With the continuous implementation of the BRI, China and Southeast Asian countries have developed much closer business relationships and trade ties.
 
In view of that, AVISTA has selected a number of the Belt and Road countries, mainly those in Southeast Asia, and conducted a comprehensive analysis of their real estate market.
 
The first country that we are looking at would be … Malaysia.
 
Please <a href="../../../../../uploads/Malaysia_belt_and_road_initiative_aba68f497d.pdf" target="_blank" rel="noopener">click here</a> to read the full report (available in Chinese version only).
 
<a href="../../../../../uploads/Malaysia_belt_and_road_initiative_aba68f497d.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/thumbnail_9d5a6ef6e3.png" alt="" width="630" height="888" /></a>

Research and Insights