Securities & Futures Commission of Hong Kong

Listed Company Failure

Q1:

Is the SFC going to request the problematic company to make an announcement about its status?

A:

The Stock Exchange of Hong Kong (SEHK) as front line regulator for listed companies will liaise closely with the company to monitor the situation and to ensure that the listed company keeps the market informed of developments.

Q2:

I am a shareholder of the problematic listed company. Can I have my money back?

A:

The SFC's responsibility is to administer laws governing the securities and futures markets in Hong Kong and to facilitate and encourage the development of these markets. However, it is not the SFC's responsibility to compensate investors for any loss in their listed investments arising from a failure of a listed company.

Currently, there is no statutory investor compensation scheme for listed company failure. The Investor Compensation Fund established under the law only provides cover in the event of the failure by a brokerage or a bank, but not for loses arising form a failure of a listed company.

The shares of such companies will likely be suspended until a time when the market is fully informed of the developments. Shareholders may sell their shares once the suspension has been lifted. Alternatively, if trading remains suspended and the company goes into liquidation, shareholders will not be able to sell their shares on the market but will need to wait for liquidation proceedings to determine whether and how much money they will recover.

Q3:

Does the SFC have any bail-out plan for the problematic company?

A:

No. It will be up to the management (or if applicable, the provisional liquiditor) of the listed company to decide the best action to take and to find a rescue plan.

Q4:

What should I do now? Should I go to the SFC or the SEHK to make a complaint?

A:

The SFC values reports on suspected misconduct in the financial markets. However, as nothing can be done during the time when the trading of the shares of a listed company is suspended and before the issue of an announcement informing the market of the company's position, there is no need for you to register a complaint with either the SFC or the SEHK.

Both the SFC and the SEHK will liaise closely with the listed company during such period to monitor the situation and to ensure that the listed company keeps the market informed of developments.

Q5:

Can I get compensated if the company does go bankrupt eventually?

A:

The shares of such companies will likely be suspended until a time when the market is fully informed of the developments. You may realise cash by selling your shares on the market once the suspension has been lifted.

Alternatively, if trading remains suspended and the company goes into liquidation, you will not be able to sell your shares on the market but will need to wait for liquidation proceedings to determine whether and how much money you will recover.

Q6:

What am I supposed to do with the problematic company's warrants?

A:

The warrants will remain suspended for as long as the shares are suspended. When the suspension is lifted, warrant holders will be able to realise their investment by selling their warrants.

Q7:

The brokerage I use is a subsidiary of the problematic listed company. May I trade as usual or may I get back my stocks deposited with the brokerage?

A:

If a brokerage becomes aware of its inability to maintain sufficient liquid capital as required by the law, the brokerage is required to notify the SFC and cease its dealing in securities immediately. While the SFC reasonably believes that a brokerage is unable to maintain sufficient liquid capital as required by the law, the SFC may, after taking into account of all factors, suspend its registration accordingly.

If you have traded in SEHK listed or traded securities, irrespective of whether you have traded through a brokerage or a bank, and suffered a loss, you may be entitled to claim against the Investor Compensation Fund.

Q8:

If my brokerage had pledged a large amount of the problematic company's shares to banks for obtaining credit facility extended to its margin clients, will the brokerage be caught in financial difficulty?

A:

A brokerage may not have financial difficulty if it is able to meet calls from the banks, if any.

Q9:

How severe an impact will be on funds with a holding on a problematic company's shares?

A:

In general, investment of a fund in securities (e.g. stocks, warrants) issued by a single issuer is limited to only 10%, hence the effect of the failure of one company would not have a significant impact.

However, in the case of index-tracking funds, relief may be granted from compliance with the 10% rule to allow index funds to closely track the index stocks. If the affected company is a major constituent stock in the relevant stock index, fund managers of the affected type of index-tracking funds would tend to have significant exposure to the affected company. Dealings may have to be suspended if the underlying assets cannot be fairly valued or there is inadequate liquidity to meet the redemption demand.

Q10:

Will the SFC request fund managers of funds with a heavy investment in a collapsed listed company to announce if their operations are severely affected?

A:

It is up to the fund managers and trustees to decide whether to suspend dealing of a fund having regard to the interests of investors and the circumstances of the fund. It may not be necessary for the funds to be suspended if, for example, there is adequate liquidity to meet the redemption demand. The primary concern for the SFC is whether a decision to suspend dealing would be in the interests of investors.

Fund managers are obligated to immediately notify the SFC of the decision for suspension. Such a decision must also be published immediately (where practicable, within one day of the decision) and at least once a month during the period of suspension, in newspapers in which the fund's prices are normally published.

Depending on the length of the suspension, a circular which details the reasons for the suspension may be required to be sent out to all investors of the fund. In addition, local investors can contact the fund manager or its Hong Kong representative for further information.

The SFC will monitor the situation closely and regular reporting may be required if there is prolonged suspension of dealings.

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