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Loopholes in cross-border regulation of mainland companies listed in Hong Kong are increasing the risks for sponsors and other professional advisers in the Special Administrative Region, and their costs of compliance.
By the Hong Kong Stock Exchange’s reckoning, H-share and red chip companies make up 31 per cent of the main board’s capitalisation. Whether these companies are legally incorporated in China, Hong Kong or the Caribbean, their business and many of their directors are based on the mainland. However, the Hong Kong securities market watchdogs – the Hong Kong Stock Exchange and the Securities and Futures Commission – have no jurisdiction to seize documents or take witness testimony in China. Nor can Hong Kong regulators take enforcement action against directors in China.
The most the Hong Kong Stock Exchange can achieve is to issue public sanctions disciplining directors in absentia. The SFC, for its part, has struck co-operation agreements with mainland regulators. However, in practice, they lack the teeth to carry out enforcement activity for their Hong Kong counterparts.
The mainland has yet to streamline its securities regulation: multiple regulators each play their part, often with very limited powers of inquiry.Statutory secrecy shrouds SFC investigations in Hong Kong, although the secrecy provisions were originally designed to prevent the Commission itself from disclosing confidential information gathered from investigations.
The system is not yet at a stage where there is a body of enforcement precedents setting standards for the market. In reality, the mainland markets are regulated not by the China Securities Regulatory Commission and other bodies, but by the police.
A number of troubled mainland companies listed in Hong Kong have directors under arrest or in jail in China – Yang Bin of Euro Asia and Zhou Zhengyi of Shanghai Land to name but two.
Practitioners suspect there is little on-the-ground co-operation between Hong Kong and mainland regulators. Historically, the SFC has had greater success co-operating with Australian regulators than with those on the mainland.
These loopholes in cross-border enforcement have driven Hong Kong regulators to shift the liability for failings by mainland companies to their sponsors and other professional advisers.
The Hong Kong Stock Exchange now requires sponsors to issue declarations of compliance with the listing rules for their work, and to comply with guidelines on due diligence. This has led to a flurry of mandates for accountants carrying out internal control reviews. On top of this, the SFC is in consultation about further regulation of sponsors and compliance advisers.
Unless cross-border enforcement loopholes are closed and the listing rules obtain statutory backing, Hong Kong sponsors and advisers will continue to pay the price.
The writer is a partner with Herbert Smith in Hong Kong