Hong Kong Stock Exchange

HKEx unveils new guidelines for companies facing allegations of fraud or other misconduct

PUBLISHED : Friday, 08 April, 2016, 10:01pm
UPDATED : Friday, 08 April, 2016, 11:30pm

Hong Kong-listed companies which are alleged to have fraud or false accounting problems will need to issue clarification announcements or their shares must be suspended from trading, according to a guidance letter issued by the stock exchange on Friday.

David Graham, HKEx’s chief regulatory officer and head of listing said the guidance letter sets out the exchange’s revised approach in instances when listed companies are subject to allegations of fraud, material accounting or corporate governance irregularities.

In some cases, allegations have been levelled at companies by short sellers or other research firms, often with the effect of triggering a price slide in the shares of the company under fire.

The Hong Kong stock exchange previously did not have a formal policy on how companies should handle the situation, particularly with reference to whether or not they should request a trading suspension.

The exchange now requires listed companies to issue a clarification announcement to address such allegations.

Companies which are unable to issue a clarification announcement will need to apply for a trading suspension to help prevent disorderly markets.

“Our revised approach is closer to the regulatory approaches of other markets and has the effect of keeping any necessary trading halt to the minimum consistent with our general approach to trading halts,” Graham said.

“In the interest of maintaining the reputation and efficiency of our market, we review our rules and practises from time to time to ensure that they have addressed developments in the market,” he added.

The exchange said the duration of the trading halt “should be for the shortest possible period” and listed companies must ensure trading resume as soon as practicable following the clarification announcement.

Listed companies will also need to ensure the announcement does not have false or misleading information or they may be in breach of Section 384 of the Securities and Futures Ordinance.

If regulators assess the company announcement as failing to sufficiently address the allegations, they can require additional information or direct the share trading suspension to be extended.

“This may be the case where, for example, the clarification announcement contains information materially inconsistent with its other published documents, or contains information which creates market confusion so as to raise the exchange’s concerns about the possible development of a false or disorderly market in the trading of the shares,” the guidance letter said.

“Depending on the nature, gravity and creditability of the allegations, the exchange may require the issuer to provide further information to support its denials of allegations, to review or conduct investigations into the claims and documents purportedly reviewed or used to support the allegations,” the letter said.

The exchange will also follow up to check on the listed companies’ internal controls and risk management system to address the problem as identified in the allegations.