Corporate Governance 

In recent years, HKEx has increasingly prioritized Environmental, Social, and Governance (ESG) factors. The consultation paper released in April showcases HKEx's commitment to enhancing the quality of ESG disclosures made by listed companies.
 
What strategies should companies adopt to establish a robust ESG governance framework and effectively adapt to future regulatory requirements concerning ESG compliance?
 
Find the answer now
<a href="../../../../../uploads/AVISTA_insight_July_2023_EN_20230705_compressed_1_2f38ab9a22.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/EN_cover_3b83b9146f.png" alt="" width="400" height="565" /></a>

image.jpg

Pathway for Establishing an Effective ESG Governance System

The Stock Exchange of Hong Kong Limited ( the “HKEX”) published two consultation conclusions —"The Profit Requirement Consultation Conclusions” and “Disciplinary Consultation Conclusions” on 20 May 2021 with an aim to further raising the quality of the Hong Kong capital market,. Among them, HKEx has decided to increase the profit requirements of the Main Board by 60%, with effect from 1 January 2022. That is, the most recent financial year shall not be less than HK$35,000,000 and, in respect of the two preceding years, be in aggregate not less than HK$45,000,000 (The three-year cumulative profit is not less than HK$80,000,000). At the same time, the HKEX will also grant grace for individual applicants that do not meet the profit distribution, and handle them flexibly.
 
The Profit Requirement is one of the three pivotal financial eligibility tests forming part of the assessment the HKEX performs to determine the suitability of applicants seeking to list on the Main Board. The most recent increase in the market capitalisation requirement was in 2018, from HK$200 million to HK$500 million. However, the profit requirement has not been revised since it was introduced in 1994.
 
The consultation conclusion pointed out that certain cases involving suspected arrangements to artificially satisfy the initial listing requirements. The Securities and Futures Commission of Hong Kong (the “SFC”) stated in a joint statement that certain IPO may allocate shares to controlled placees at a high share price to meet the HK$500 million minimum market capitalisation requirement. Its purpose is to manipulate the relevant shares in the future. For example, through a ramp-and-dump scheme to “ramp” up the share price. Ramp-and-dump scheme is a form of stock market manipulation where fraudsters use different means to “ramp” up the share price of a listed company and then induce unwary investors to purchase the shares that the fraudsters then “dump” at an artificially high price. The schemes are typically conducted using social media platforms.
 
In light of the concerns identified in the joint statement, where a listing application displays one or more of the following features, the SFC and HKEX will make enquiries: 
<ul>
<li>The applicant’s market capitalisation barely meets the minimum threshold under the Listing Rules</li>
<li>Very high price-to-earnings (“P/E”) ratio</li>
<li>Unusually high underwriting or placing commissions or other listing expenses</li>
<li>Shareholding is highly concentrated in a limited number of shareholders</li>
</ul>
 
On the same date, HKEX has also published a disciplinary consultation. It will augment the range of reputational sanctions available.  It will ensure that disciplinary action can be brought against a broader range of individuals, including members of senior management, if they cause or knowingly participate in a contravention of the Listing Rules. The disciplinary consultation conclusions will be implemented with effect from 3 July 2021.
 
Click the below cover images to read the Consultation Conclusions and the Joint Statement. 
 
<a href="https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/November-2020-MB-Profit-Requirement/Conclusions-(May-2021)/cp202011cc.pdf?la=en" target="_blank" rel="noopener"> <img src="../../../../../uploads/hkex_consultation_conclusions_cover_1_8576f0a758.jpeg" width="250" height="351" /> </a> <a href="https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/August-2020-Disciplinary-Powers/Conclusions-(May-2021)/cp202008cc.pdf?la=en" target="_blank" rel="noopener"> <img src="../../../../../uploads/hkex_consultation_conclusions_cover_2_fa028251b4.jpeg" width="250" height="355" /> </a> <a href="https://www.hkex.com.hk/-/media/HKEX-Market/News/News-Release/2021/210520news/IPOJointStatement_e.pdf?la=en" target="_blank" rel="noopener"> <img src="../../../../../uploads/SFC_joint_statement_b4bf6135be.JPG" width="250" /> </a>

1612973910056.jpeg

HKEX Consultation Conclusions on The Main Board Profit Requirement and Review of Listing Rules Relating to Disciplinary Powers and Sanctions

The Stock Exchange of Hong Kong Limited (the "HKEX") published a consultation paper outlining proposed enhancements to the Corporate Governance Code and Corporate Governance Report (the "Code"), as well as related amendments to the Listing Rules on 16 April 2021. The proposals include new measures aimed at further enhancing corporate governance standards among listed issuers in Hong Kong, specifically in the areas of corporate culture, director independence, diversity, and in Environmental, Social and Governance (ESG) disclosures and standards. Governance and oversight of ESG matters and management of material ESG risks is an integral part of good corporate governance. Therefore, the HKEX is revising the Code to elaborate the linkage between corporate governance and ESG.
 
Key proposals include:
 
<ol>
<li>Corporate culture 
<ol style="list-style-type: lower-alpha;">
<li>Align company’s culture with its purpose, values and strategy; and </li>
<li>Require issuers to have anti-corruption and whistleblowing policies. + New Code Provisions, subject to a “comply or explain” basis </li>
</ol>
</li>
<li>Board independence, refreshment and succession planning 
<ol style="list-style-type: lower-alpha;">
<li>Require issuers to have a policy to ensure independent views are available to the board, and annual review of its effectiveness; + New Code Provisions </li>
<li>Require independent shareholders’ approval for re-election of an independent non-executive director (INED) serving more than nine years (Long Serving INED) and additional disclosure; o Revised Provisions </li>
<li>If all INEDs on the board are Long Serving INEDs, require appointment of a new INED at the forthcoming AGM, and disclose the length of tenure of the Long Serving INEDs on a named basis; and + New Code Provisions </li>
<li>Mandatory Nomination committee, chaired by an INED and comprising a majority of INEDs. ↑ Upgraded to a Listing Rule </li>
</ol>
</li>
<li>Diversity 
<ol style="list-style-type: lower-alpha;">
<li>Single gender board is not considered to be a diverse board; </li>
<li>Mandatory numerical targets and timelines for achieving gender diversity at both board level and across the workforce; and + New Mandatory Disclosure Requirement under the Code </li>
<li>Requirements for boards to review progress of diversity policy annually. After the revised Rules take effect, existing issuers with single gender boards will be allowed a three-year transition period to appoint at least one director of the absent gender on their boards. IPO applicants are not expected to have single gender boards. + New Code Provisions </li>
</ol>
</li>
<li>Communication with shareholders 
<ol style="list-style-type: lower-alpha;">
<li>Mandatory disclosure on shareholders communication policy, and annual review of its effectiveness. ↑ Upgraded to Mandatory Disclosure Requirement </li>
</ol>
</li>
<li>ESG 
<ol style="list-style-type: lower-alpha;">
<li>Require issuers to elaborate the linkage in the Code by: (i) setting out the relationship between CG and ESG in the introductory section in the Code; and (ii) including ESG risks in the context of risk management under the Code; and </li>
<li>Revise the Rule and the ESG Guide to require publication of ESG reports at the same time as publication of annual reports. If this proposal is adopted, this will be effective for issuers’ financial years commencing on or after 1 January 2022. </li>
</ol>
</li>
</ol>
The HKEX's new ESG reporting requirements (effective from July 2020) have incorporated certain important elements of the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations. In late 2020, the Hong Kong Government announced its aim to achieve carbon neutrality by 2050, and the Green and Sustainable Finance Cross-Agency Steering Group announced the initiative towards mandatory TCFD-aligned climate-related disclosures by 2025.  The HKEX encourages issuers to adopt the TCFD Recommendations when disclosing climate change-related information under the ESG Guide and will provide further guidance in this regard.
 
The deadline for responding to the Consultation Paper is 18 June 2021. Click <a href="https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/April-2021-Review-of-CG-Code-and-LR/Consultation-Paper/cp202104.pdf?la=en" target="_blank" rel="noopener">here</a> to read the full consultation paper.
 
<a href="https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/April-2021-Review-of-CG-Code-and-LR/Consultation-Paper/cp202104.pdf?la=en" target="_blank" rel="noopener"><img src="../../../../../uploads/hkex_consultation_paper_cover_11b6811403.jpeg" width="247" height="347" /></a>

building-1031504_1920.jpg

HKEX Consultation Paper on ‘Review of Corporate Governance Code and Related Listing Rules’

The International Valuation Standards Council (“IVSC”) Financial Instruments Board (“FI Board”) has published the Exposure Draft (the “Draft”) with proposals to improve the valuations of financial instruments outlined in IVS 500 Financial Instruments (“IVS 500”). The IVSC FI Board has launched the consultation to invite comments on the proposals in the Draft, which covers (1) Standards objectives and agenda, (2) Guidance on governance around valuation process, and (3) Principles of data taxonomy and control. As a professional valuation advisory firm, AVISTA has outlined the key points in the Draft for the latest proposals of improvements of financial instruments valuation.
 
Standards Objectives and Agenda
 
In review of IVS 500, the FI Board aims to establish the principles that will enable entities to develop fit-for-purpose valuations of financial instruments adaptable to varying market conditions or circumstances and to different reporting purposes, including financial, tax, and regulatory reporting. The proposals made by the FI Board are principles-based guidance requiring valuation processes in line with the concepts outlined in IVS 500. Meanwhile, considering the potential conflicts with the requirements in other International Valuation Standards (“IVS”), the Standards Review Board is also proposing consequential amendments to IVS 101 Scope of Work to IVS 105 Valuation Approaches and Methods.
 
The improvements to IVS 500 will be considered in stages, where the Draft firstly focuses on the areas of Governance and Data. The two remaining areas of Methods and Models, and Controls and Reporting will be considered and published in subsequent documents that will also contain revised proposals on Governance and Data based on received comments for the Draft. This practice is to address the interdependencies among different areas and facilitate the comments from the stakeholders on the proposals.
 
Guidance on Governance around Valuation Process 
 
The Draft proposes the guidance over the valuation processes that entities should follow to ensure adequate governance around financial instrument valuations. A valuation process should be (a) systemic, (b) consistently applied, (c) economically sound, and (d) controlled. To be specific, the governance around valuation process requires the valuation of financial instrument with similar portfolios, financial principles and market practice to be developed consistently, with end-to-end documentation and controls’ implementation.
 
The Draft, in the meantime, also highlights a series of principles covering the governance and controls over financial instruments valuation, including (a) ownership, (b) accountability, (c) transparency, (d) consistency, (e) review and challenge, (f) diversity, (g) documentation. In general, the principles emphasize clear responsibility for execution among different functions and individuals, transparent documentation for consistent valuation methods, as well as independent and diverse assessment for valuation processes.
 
Principles of Data Taxonomy and Control
 
The Draft highlights the importance of data as inputs to the valuation process to derive fit-for-purpose valuation. The quality of data adopted in the valuation process should ensure the objectivity and the effective communications of the valuation decisions.
 
The Draft proposes a data taxonomy differentiating static data and dynamic data to establish the standardized best practice for participants both within and across the entities involved in the valuation processes. It is not mandatory to adopt the taxonomy outlined in the Draft, but any taxonomy developed and adopted by an entity should be consistent with the principles proposed in the Draft.
 
In addition, the Draft requires the policies and processes in place to control the identification, assessment, aggregation and management of outsourced and internally generated data. In particular, the policies and processes should ensure (a) accuracy and integrity, (b) completeness, (c) adaptability, (d) timeliness, (e) transparency and (f) proportionality.
 
<a href="https://www.ivsc.org/files/file/view/id/1890" target="_blank" rel="noopener"><img src="../../../../../uploads/cover_586d37e853.jpeg" width="200" /></a>
 
To read the full Exposure Draft released by IVSC, please click <a href="https://www.ivsc.org/files/file/view/id/1890" target="_blank" rel="noopener">here</a>.
 
AVISTA’s Professional Services for Financial Instruments Valuation
 
As a corporate member of IVSC, AVISTA provides professional valuation and financial advisory services on financial instruments. The knowledge and experience of AVISTA can facilitate the most appropriate valuation service ensuring IVS-compliant valuation processes and reporting.
 
We are closely monitoring the latest development of IVSC consultation for valuations of financial instruments. For further information or enquiry regarding the Exposure Draft, please feel free to contact us.

92390624_m - Copy

IVSC Exposure Draft on Improvements of Financial Instruments Valuation

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.

121796308_m

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

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.