Changes to Hong Kong Securities and Futures Commission’s approach to certain listings will help raise capital and mitigate risk for investment in Belt and Road projects
The massive scale of the Belt and Road Initiative creates an obvious need for large pools of cash to fund infrastructure projects. Capital raising on such a grand scale has led to Hong Kong authorities making significant changes in their approach to certain listings, in order to accommodate a broader range of project companies.
In April 2017, Hong Kong’s Securities and Futures Commission (SFC) announced* changes to its approach to scrutinising applications to list on the Hong Kong Stock Exchange (SEHK). The changes set out a more flexible approach to approving listings of certain infrastructure project companies.
As one of the world’s leading financial and arbitration centres, Hong Kong is ideally placed to facilitate Belt and Road investment, supported by its internationally-respected legal and regulatory regime, free flow of capital, simple tax system and experienced professionals who understand the risks associated with investing in Belt and Road countries.
Currently, only businesses incorporated in 25 jurisdictions are eligible to list on the SEHK, of which only five are ASEAN members. However, the SFC’s new direction means that ventures in ASEAN nations as well as those outside the region can now proactively seek to list in Hong Kong. This is because the SFC has signalled its willingness to take into account a range of risk mitigation factors relevant to many Belt and Road projects. Key factors now being considered during the SFC’s assessment of applications to list in Hong Kong include:
- A large shareholding by a relevant Chinese mainland state-owned enterprise, sovereign wealth fund, substantial listed company or global institutional investor
- A sizeable mainland, development or international bank committed to providing ongoing project finance
- A direct involvement or shareholding by the national government of the jurisdiction in which the project assets are located
IPOs and the Belt and Road
Describing the SFC’s changes as a breakthrough, Teresa Ko, Partner and China Chairman at international law firm Freshfields Bruckhaus Deringer and Non-Executive Director of the SFC, said the move gives Hong Kong an edge when it comes to infrastructure investment in ASEAN and other Belt and Road countries.
Teresa Ko, Freshfields Bruckhaus Deringer
“As a fund-raising venue for specific Belt and Road projects, our exchange dovetails very nicely with the Hong Kong government’s role as a facilitator and promoter of this important national strategy,” Ko said.
“An IPO listing is a great opportunity for a project to take itself to the next level in terms of transparency, governance and best practices. Everyone will know you have been subjected to the scrutiny of regulators, intermediaries, and institutional and retail investors,” she said.
How it works
While, to date, no IPOs have been listed as a direct result of the SFC’s move, the changes have nevertheless significantly increased the number of jurisdictions that could potentially invest in Belt and Road projects and made it easier to raise funds for infrastructure projects via an IPO.
“If a project is not in an approved jurisdiction, even if that location doesn’t have regulatory cooperation with the SFC, you could hold the project company through a Hong Kong incorporated company to satisfy one of the SFC’s new considerations for listing, so long as you have a set of books or records in Hong Kong, or have Hong Kong resident individuals as directors of that company. Regulators will take these factors into account when considering the listing of that infrastructure project on the SEHK,” Ko said.
“Hong Kong is also the only major international exchange with provisions relating to project companies. It even has a definition of what constitutes a project company,” she said.
Ko believes the SFC’s decision to harness growing interest from investors in infrastructure projects will not affect its reputation for having stringent listing rules or its clear aim to mitigate potential investment risks.
“The SEHK listing process is renowned for being demanding, with rigorous vetting of due diligence, internal controls and suitability of the business,” she said.
Gathering pace
The rapid pace of growth in the Chinese mainland and ASEAN is presenting Hong Kong with so many opportunities that Ko senses the level of demand may be somewhat overwhelming for investors.
“It’s almost as if we are bombarded by so many opportunities that we lack focus. The market has been gripped by new biotech listings and there are plenty of opportunities arising from the Guangdong-Hong Kong-Macau Bay Area development.”
While these opportunities are competing to win over investors in search of quick returns, Ko believes Belt and Road opportunities are attractive to different types of investors, such as sovereign wealth funds. She states the new channel that has been opened up by the SFC is not for speculators, rather it provides an option for seasoned investors to make long-term investments in Belt and Road infrastructure.
“Belt and Road projects tend not to be low hanging fruit in terms of ease of execution, and they tend to be in locations with a lot of legal and political uncertainty. This means that they are complex, long-term and high-risk endeavours. But the SFC’s new approach is a shot in the arm for Hong Kong’s ability to attract listings related to the Initiative,” Ko said.
*You should pay careful attention to the Legal Information section on the homepage of the SFC’s website when referring to information using this link.
