Exchange tightens rules on warrants

THE stock exchange will ban the listing of covered warrants issued by controlling shareholders on their own shares.

In new rules due to come into force on October 1, the exchange is taking the controversial step of closing the door on covered warrants similar to those issued by Li Ka-shing on Cheung Kong (Holdings) and Hutchison Whampoa and Gordon Wu Ying-sheung on Hopewell Holdings.

Mr Li is chairman of both of his companies and Mr Wu is managing director of Hopewell.

A statement from the exchange yesterday said: ''Because of the potentially conflicting interests where an issuer of derivative warrants also has control over the underlying listed company, warrants issued by controlling shareholders or by persons with effective management control over the underlying company will no longer be considered suitable for listing.'' Covered warrants are traded derivatives entitling the investor to buy a share at a fixed price over a given period. The price of the warrant amounts to a premium; being the price expressed as a percentage of the current share price of the underlying share.

They can be settled in shares or the cash equivalent of the calculated money made on the purchase where the warrant is in the money.

Other changes include issuers having to state earlier in the proceedings whether a cash or stock alternative is being offered in settlement.


Issuers will have to state clearly and prominently in the listing document their regulatory status or unregulated status, as the case may be.

''Clear measures are implemented to limit the proportion of underlying shares over which derivative warrants maybe issued, as well as to restrict the eligibility of shares which may constitute a basket warrant,'' the exchange said.

Exchange executive director and head of listing Herbert Hui Ho-ming said yesterday the exchange decided to issue new regulations involving covered warrants to improve regulation and enhance investor protection.

''We look at these products as something not cast in stone and the main thing is experience,'' he said.


''If we find there are areas that need to be tightened, we tighten them. If, on the other hand, there are rules that can be relaxed, we do that.'' Mr Hui denied the new regulations were prompted by a specific issue but, rather, were an effort by the exchange's derivatives rules committee to have rules that were as equitable as possible.

Other minor changes will also seek to avoid unjust windfalls to issuers by requiring the automatic exercise of cash warrants upon expiry in the money. The listing fees are also set to increase.


In the exchange statement, Mr Hui said: ''The new changes represent another step towards firmly establishing Hong Kong as a major financial centre which is able to offer issuers and investors a wide range of well-regulated products.'' Mr Li's warrants expired in the spring of this year after two years of trading on the exchange. The Polycourt warrants covered shares in Hutchison and the Sponikle warrants covered shares in Cheung Kong.