Disclosure requirements regarding the application for IPO shares
As part of its Simplification Series to improve disclosures in IPO cases, the Hong Kong Stock Exchange (SEHK) has issued a new guidance letter (GL64-13) on improving disclosures in (i) the "How to Apply for Hong Kong Offer Shares" (HTA) section in prospectuses and (ii) White and Yellow Application Forms (Application Forms) for IPOs. The SEHK considers the guidance to be necessary because at present, the HTA section in prospectuses tend to be too lengthy and legalistic which make it difficult for investors to understand, whilst the font size in Application Forms is too small for investors to read.
According to the SEHK'S guidance, Application Forms should:
- Be printed on A3 sized paper
- Be easy to read, ie the font size should be at least an equivalent of 12 Times New Roman font
- Contain a reminder to investors that they should read the forms in conjunction with the prospectus
On the other hand, the HTA section in prospectuses should contain more detailed information on the application procedures for the IPO shares. However, according to the guidance letter any duplication of information between the HTA section and the Application Forms should be avoided unless necessary.
The guidance letter also helpfully provides for use by listing applicants sample Application Forms and a draft HTA section. Listing applicants should consider and adopt these accordingly in order to comply with the relevant disclosure requirements.
In addition to the above guidance, listing applicants should also be mindful of the overriding requirements that the Application Forms and the HTA section must (i) contain all the information required under the Listing Rules, Companies Ordinance and CCASS Guide and (ii) be drafted in plain language for easy understanding.
IPO disclosures relating to PRC properties
In another guidance letter (GL19-10), the SEHK has provided guidance on its disclosure requirements relating to a listing applicant's properties in the PRC. Currently, the Listing Rules contain specific requirements regarding such disclosures, for instance, the requirement to disclose details regarding any properly approved land grants or land use right certificates (supported by a PRC legal opinion). In addition, the SEHK published an announcement in 1998 entitled "Clarification on Requirements for Land Use Title of Properties Situated in the Mainland of the People’s Republic of China", which required all listing applicants to obtain long term title certificates for their PRC properties.
Since that 1998 announcement, the PRC registration authorities have eased the administrative procedures to obtain title certificates. The Listing Committee reacted accordingly and has decided since 2005 that property applicants (rather than all applicants, as required in the 1998 announcement) are required to obtain title certificates for completed properties and properties under development in the PRC. The requirement to obtain long term title certificates also continue to apply to infrastructure project companies. This has been confirmed in guidance letter GL19-10, which the SEHK originally issued back in 2010.
That guidance letter has just been updated and now provides that applicants which are neither property nor infrastructure project companies will no longer require title certificates for their PRC properties. Instead, applicants should just disclose in listing documents the risks they face if they do not have the requisite title certificates.
Other notable matters in the updated guidance letter GL19-10 include the following:
Listing applicants should disclose information relating to the reasons for defective titles, the importance of such titles (from the directors’ perspective) to the company’s operations, the safety conditions of the buildings concerned, any remedial actions taken and a legal opinion as to whether such defects will affect the applicant’s ability to secure mortgages.
There are PRC restrictions regarding idle land and development timeframes for land granted to property developers. For this reason, listing applicants must disclose details of any idle land in the PRC and whether they have failed to comply with the relevant PRC laws and regulations regarding agreed development plans (and if so, any remedial actions taken). A risk factor associated with idle land should also be included.
Civil defence projects
Restrictions exist in the PRC regarding national defence properties, which are considered to be assets of the state (although investors can use and manage such properties in times of peace). In light of this, the guidance letter requires disclosure of certain information regarding such projects, in particular the area of such projects, the usage of the civil defence area and the conditions for use of civil defence properties. A risk factor associated with the use of civil defence properties should be included in the listing document.
Land resettlement operations
Listing applicants which engage in land settlement operations must disclose details of the land resettlement agreements (eg the number of agreements and total costs involved in the operations), the level of involvement of the local government authority and a legal opinion on whether such operations have complied with the relevant PRC laws and regulations. Again, a risk factor associated with these operations must be disclosed.
Latest developments in the PRC: safe simplifies foreign exchange rules for cross-border payments in the service sector
On 18 July 2013, the State Administration of Foreign Exchange of the PRC (SAFE) released the Circular on Circulation of Foreign Exchange Administration Regulations regarding Trade in the Service Sector (国家外汇管理局关于印发服务贸易外汇管理法规的通知), which became effective on 1 September 2013. This Circular contains three appendices: the guidelines 1 (Guidelines), implementing rules of the Guidelines 2 (Implementing Rules) and a list of abolished SAFE regulations (collectively SAFE Circular 30).
SAFE Circular 30 streamlines the foreign exchange administration regime for cross-border payments relating to the service sector. It applies to various trading activities under the current account and which are not related to goods, such as the provision of services, technology licensing, trademark licensing, distribution of profits and dividends, expense reimbursements, as well as payments of expenses of foreign companies' representative offices (Service Trade Items).
The key points of SAFE Circular 30 are as follows:
- Under the current regime, cross-border payments for Service Trade Items are subject to a review of the relevant documentation by the handling banks before any remittance can be made. SAFE Circular 30 generally exempts this requirement for any payment of no more than US$50,000 (or an equivalent amount in other currencies), ie the onshore payer does not need to provide transaction documents to the bank in such cases
- Regarding any cross-border payments for Service Trade Items which are above US$50,000, supporting documents must still be submitted for the handling bank's review in order to complete the remittance. SAFE Circular 30 lists out the documents required for different types of payment, some of which are simplified compared with those under the current regime. For example, for technology imports and exports, under the new regime a registration certificate issued by the Ministry of Commerce (or its local branches) is only required for submission for remittances relating to certain restricted categories of technology. Such a registration certificate is no longer a prerequisite for remittance of foreign exchange for other types of technology
- Under the current regime, for any outbound payments for Service Trade Items which are above US$30,000, a tax clearance certificate is generally required to be submitted to the handling bank before the remittance can be made (with exemptions for certain types of Service Trade Items such as payments of overseas travel expenses, exhibition fees and operation fees of foreign companies' representative offices etc). Such a tax certificate is no longer required under the new regime. According to SAFE Circular 30 and another SAFE circular issued in July 2013 3, if an outbound payment for Service Trade Items is above US$50,000, the payer only needs to file such remittance with the relevant state tax authority, who will immediately issue a filing form to the payer for submission to the handling bank (similar exemptions on certain types of Service Trade Items are also available). After the remittance is made, the relevant tax authorities will conduct a substantive review of the filing within 15 days upon its receipt, and
- SAFE Circular 30 also allows domestic enterprises to keep foreign exchange received under Service Trade Items in their offshore bank accounts. Opening such offshore bank accounts is subject to SAFE's approval and certain conditions need to be satisfied. For instance, the enterprise involved needs to show that it has regular needs to settle offshore payments, a good compliance record with foreign exchange regulations in the last two years and a sound internal policy on the management of offshore accounts. In addition, the total amount that may be kept offshore should not exceed 50% of the enterprise's total foreign exchange revenue generated from Service Trade Items in the previous year.
1 Guidelines on Foreign Exchange Administration of Trade in the Service Sector (服务贸易外汇管理指引)
2 Implementing Rules of the Guidelines on Foreign Exchange Administration of Trade in the Service Sector (服务贸易外汇管理指引实施细则)
3 Circular on Relevant Issues regarding Tax Filing for Outbound Payment for Service Trade and other Items (关于服务贸易等项目对外支付税务备案有关问题的公告)