'Through train' dispute risks voiced
Brokers and accountants have called on government regulators to introduce measures to deal with disputes between Hong Kong shareholders and mainland companies after local investors were given approval to buy Shanghai-listed shares from October.
Under a proposed "through train" scheme announced on Thursday by Hong Kong and mainland regulators, investors can trade up to 550 billion yuan (HK$691 billion) worth of Hong Kong and Shanghai stocks.
Brokers say the move will boost turnover of both markets but may also lead to more disputes between shareholders and the listed companies.
"Many mainland investors do not understand Hong Kong listing rules and trading rules, while the Hong Kong investors also have little understanding on A-shares regulation. This may lead to misunderstandings and disputes between investors, listed companies and regulators," said Jojo Choy Sze-chung, the vice-chairman of the Institute of Securities Dealers.
For example, under mainland regulations a stock that moves up or down by 10 per cent is automatically suspended from trading to cool down the market; no such rule applies in Hong Kong.
For suspensions relating to other reasons, on the mainland the China Securities Regulatory Commission orders the company to suspend trading while in Hong Kong it is usually the listed company that asks the exchange to suspend trading in its shares.
"Hong Kong Exchanges and Clearing and the Shanghai Stock Exchange over the next six months will need to learn how to handle these regulatory differences otherwise there would be a lot of confusion in cross trading," Choy said.
Clement Chan Kam-wing, the president of the Hong Kong Institute of Certified Public Accountants, said mainland listed A-share companies were audited by mainland auditors that were not regulated by Hong Kong authorities.
"[We] would rely on the Ministry of Finance and the China Securities Regulatory Commission to investigate mainland accountants if there are any audit problems. Likewise, mainland regulators also cannot come [to Hong Kong] to do investigations. Investors need to beware of this regulatory issue," Chan said.
Derek Lai, Asia-Pacific leader of restructuring services at Deloitte Touche Tohmatsu, said cross trading would allow individuals to invest in A shares and vice versa, and this may lead to more disputes if companies go bankrupt.
Under the present system for dealing with bankrupt firms, if Hong Kong-listed mainland companies have most of their assets on the mainland, the liquidators have difficulty retrieving those assets on behalf of Hong Kong shareholders. Lai said these difficulties might increase if Hong Kong investors are buying Shanghai-listed shares.
"When investors are buying H shares or mainland-owned red chips in Hong Kong, these companies need to follow Hong Kong companies' laws and listing rules, which at least give more protection to the Hong Kong shareholders when the firms go bankrupt. If they are A-share companies following mainland laws and listing rules, any liquidation of these companies may be handled entirely by mainland liquidators and mainland courts," he said.
"Mainland and Hong Kong courts would need to work out how to solve the problems of cross-border shareholder disputes in the case of liquidation."