On 31st May, 2001, Hong Kong Exchanges and Clearing Ltd. issued a consultation paper detailing proposed changes to the rules relating to the listing of warrants on the Hong Kong Stock Exchange. The exchange's objectives, which it hopes to accomplish by implementing the new rules, are to provide a more tailored regulatory regime for listed derivative products and to develop the market by continuing to provide a range of derivative products for investors.
The exchange's proposals fall mainly into two categories. The first relates to the arrangements for the eligibility, placing and trading of warrants and the second relates to the disclosure requirements for listing documents.
One major change that falls into the first category is the proposed abolition of a rule that requires each issue to be initially placed either with at least 100 placees or with at least 50 placees who must take up a minimum of HK$100,000 worth of warrants each. Another is the abolition of a rule setting a 15% limit on the amount of warrants that may be retained by an issuer on the launch of a warrant issue.
Loosening Restrictions
Also, issuers are currently prohibited from launching warrants if certain types of research have been published on the underlying securities, indices or assets within one week prior to the launch of a warrant issue. It is proposed that this restriction be abolished and that issuers will only have to refer to the publication of research in the public announcement which is required to be made on launch of any warrant issue.
In terms of eligible underlying securities and assets, the exchange is proposing that all Hang Seng Index stocks be eligible for issues of single stock warrants and is seeking comment on further developing the market in Hong Kong for warrants over non-Hong Kong shares and indices. This will result in issuers being able to offer a wider range of products to investors. Issuers will also need to consider the exchange's proposals relating to the introduction of formal market making for derivative warrants.
In terms of new disclosure requirements for listing documents, it is proposed that there will be a reduction in disclosure requirements in terms of the financial information required to be included in relation to the issuer and/or the guarantor and in terms of what has to be included in respect of the underlying securities, assets or indices. It is also proposed that certain of the now standard terms and conditions of the warrants be set out in the exchange's rules. This should save time and costs for issuers. In addition, the proposed abolition of the current requirement to include in the listing document a six week proprietary dealings history in the underlying securities and other instruments relating to the securities will remove an administrative burden for issuers. Another cost saving measure is the proposal that issuers may issue announcements on the exchange's Web site rather than in the local newspapers, both at launch and at the expiry of the warrants.
The main area of concern for issuers is the proposal that the listing document would have to be registered as a prospectus for the purposes of the Companies Ordinance. It is a commonly held view that warrants are not shares or debentures and therefore would not come within the ambit of the prospectus requirements of the Companies Ordinance. Considerable waivers would need to be granted from the prospectus requirements contained in the Third Schedule to the Companies Ordinance if the current timetable for the placing of an issue of warrants is to be met. The application of the prospectus requirements to the listing document seems to run contrary to the exchange's efforts elsewhere in the consultation paper to simplify the listing document.
The exchange has issued a questionnaire in connection with the consultation paper and has requested that comments on the proposed changes be submitted by 30th June, 2001. There is currently no fixed timetable for the implementation of the new rules, although the exchange intends to introduce some of the changes as expeditiously as possible after the end of the consultation period.
This week's Learning Curve was written by Catherine Husted, partner and head of the Asian derivatives group at Allen & Overy in Hong Kong.
