The Securities and Futures Commission is examining its legal options in the face of the Government's self-declared exemption from the securities disclosure law, according to sources. The move comes as the exemption faces increasing scrutiny and criticism from members of the business and legal community. By law, investors must make a public disclosure when they accumulate more than 10 per cent of a company's shares. On Wednesday the Hong Kong Monetary Authority said it was 'not bound' by the law and that disclosure would only play into the hands of the speculators it was trying to defeat. Analysts said the exemption raised complex legal questions for the SFC or any other actors which may seek to challenge the exemption. 'They may be correct in the letter of the law but in the spirit of the law - and in the spirit of free markets - they are not correct,' said a strategist with an overseas investment bank. The HKMA said its exemption was justified by the Interpretation and General Clauses Ordinance, which states that no ordinance is binding on the Government 'unless it is therein expressly provided or unless it appears by necessary implication that the Government is bound'. Analysts said the 'necessary implication' phrase was an important caveat to the Government's claims of exemption. 'It will be a question of whether the Government would be bound by necessary implication,' said Hong Kong University professor of law Yash Ghai. 'I suppose one could argue that if the Government enters the commercial sector and takes on the rights and obligations of a shareholder then by necessary obligation it should [adhere to securities law]. 'The argument would be if they do enter the market they have to behave like others.' Analysts said it was possible that the Government had stakes exceeding 10 per cent in blue chips including New World, Swire Pacific, China Resources, Cathay Pacific and possibly Cheung Kong. 'Most securities houses are estimating what the HKMA holdings are and the range seems pretty tight,' said the strategist. 'With this information the hedge funds can work it out for themselves . . . so the Government would have enhanced their credibility by just coming forward.' Others said the issue was minor compared with the larger concern of how the Government's estimated US$15 billion buying spree would affect the dynamics of Hong Kong's market. 'I don't think the issue [of disclosure] is very serious,' said Daiwa financial analyst Stephen Leung. The bigger issue, says Mr Leung, is that those large stakes have decreased the free-float of the Hang Seng Index by a stunning 40 per cent, which shrinks the market's liquidity and raises its volatility.