The Securities and Futures Commission (“SFC”), Hong Kong Exchanges and Clearing Limited (HKEx) and Federation of Share Registrars Limited (FSR) published a Consultation Paper on a Revised Operational Model for Implementing an Uncertificated Securities Market in Hong Kong in January 2019 with a deadline for responding of 27 April 2019. This is the third consultation on a paperless securities market for Hong Kong: the first Consultation on Proposals for a Scripless Securities Market was held in February 2002 and concluded in September 2003. A second consultation on a scripless securities market followed in December 2009 and resulted in the publication of proposals in September 2010, which would have removed the nominee model and allowed investors to hold legal title to paperless securities in their own name in CCASS.
The latest 2019 proposals (the “Revised Model”) represent a step backwards from the 2010 proposals (“2010 Model”) in that:
(a) The Revised Model will not deliver the “fundamental objective” of an uncertificated securities market – described in the latest Consultation Paper as “giving investors the option to hold securities in their own name and without paper documents” (at paragraph 20(a)). Instead, the Revised Model will retain the nominee model whereby legal title to securities held in CCASS will remain registered in the name of HKSCC-NOMS as nominee, and securities holders will hold only the beneficial interest.
(b) Under the Revised Model, shareholders in listed companies will only be able to be registered as the legal owner of the shares in the companies’ register of members (and thus be able to attend and vote at general meetings in their own name) where they elect to hold paper shares (as at present).
(c) The right to hold paper shares (and be registered as legal owner entitled to all the rights that attach to legal ownership) will however:
i. be temporary – the Consultation Paper notes that the right to have certificated shares will last for a limited, as yet unspecified, time only - the ultimate intention is to completely phase out paper securities (at paragraphs 107 and 120); and
ii. not always be available – eg in the case of newly issued securities (on IPO or securities entitlements) where an issuer opts to issue paperless securities only).
(d) Consequently, the current complex arrangements for securities holders to vote and for issuers to communicate with securities holders will persist. The Revised Model is arguably more complicated than the existing model since:
i. Investors holding through the new USI and USS accounts will have to communicate with the issuer through the share registrar. For USS account holders, this will be through their sponsoring clearing or custodian participant (“Sponsoring CP”) and the HKEx system. All instructions (including voting instructions and the exercise of corporate action rights (eg election of scrip or to and from issuers) will thus be routed via the Sponsoring CP;
ii. Corporate action instructions under the Revised Model will be virtually unchanged and will continue to be routed through the HKEx system;
The primary benefit of the Revised Model is the electronic interface to be introduced between HKSCC’s and the share registrars’ systems to facilitate the movement of uncertificated shares into and out of HKEx’s system. The limited changes proposed are however disappointing given the amount of work required in terms of changes to statute and SFC guidelines and that Hong Kong will still not have a fully dematerialised, immobilised and transparent securities market, when paperless trading has been possible on all leading international securities markets for some time (including New York, London, Shanghai and Shenzhen) as well as on many other markets (including Singapore, India and the Philippines). It is crucial that Hong Kong rectify this situation to ensure that HKEx is seen to be a modern and innovative market which prioritises investor protection.
Other changes proposed include:
(a) A more stringent regulatory regime for share registrars given their increased role under the Revised Model, with responsibility for evidencing and effecting transfers of legal title to listed securities;
(b) A limit of two proxies per shareholder will be re-imposed due to abuse of the removal of the limit to disrupt shareholder meetings;
(c) The deadline for submitting proxy materials will be changed from 48 hours before the meeting to one clear business day before the meeting day – business days exclude Saturdays and Sundays; and
(d) The proposed reforms will require changes to HKEx’s Listing Rules, the SFC’s Codes and Guidelines and the rules and operational procedures of CCASS, and the conduct of public consultations thereon; and
(e) With respect to stamp duty, the Securities and Futures and Companies Legislation (Uncertificated Securities Market Amendment) Ordinance 2015 amended the Stamp Duty Ordinance to facilitate the stamping of off-exchange transactions in uncertificated securities. It is expected that stamp duty would be paid and collected through share registrars and/or intermediaries and would require their declarations as to whether stamp duty is chargeable and has been paid.