Introduction

This article provides an overview of issuing debt securities in one of the world's most active securities markets, the Hong Kong Stock Exchange. Debt securities like bonds are among the most common and efficient ways for businesses to raise funds. Bonds can be defined as a commitment to a financial obligation within a given time frame: investors purchase the security from the issuer, who promises to make regular payments at an agreed-upon percentage and repay the principle investment at an agreed-upon future date.

The general way companies issue bonds is to publicly list them for sale or subscription on a stock exchange, which requires several procedural steps for qualification. The rules and regulations for listing may differ by stock market, but in general the legal requirements for a public offer of bonds are expensive and time-consuming. For this reason, many companies choose to conduct a private placement of bonds to only a limited number of pre-selected professional investors.

Offering debt securities only to professional investors has several advantages over a public offering. It is often subject to lighter regulations and has expedited procedures compared to its counterpart. In a public offering, the regulations are largely designed to protect the public from scams or bad investments by requiring extensive due diligence. In contrast, private placements require lighter regulation because the investors purchasing the bonds are institutional investors with sophisticated knowledge and understanding of financial markets.

Market Overview

The Hong Kong Stock Exchange (HKSE) is the second largest exchange in Asia, after the Tokyo Stock Exchange.¹ From the start of the 2018 until at the end of July 2018, the HKSE was able to raise HK$ 566.5 billion (USD 72.1 billion) only from the debt securities market. ²

The HKSE offers two markets for its participants: (i) Main Board listing; and (ii) Growth Enterprise Market listing.

Growth Enterprise Market is an alternative market to the Main Board aimed to provide capital-formation opportunities for growth companies. Because it is a listing venue for smaller, growth companies, the listing eligibility criteria are lower than for the Main Board.³ Thus, investors are reluctant to invest in this market. On the contrary, the Main Board Listing is available for nations, supranational entities and private corporations.

Listing for the Main Board is regulated by the Main Board Listing Rules (“MBLR”) of the HKSE. According to the MBLR, there are two principal types of debt securities that can be listed on the HKSE: (i) debt securities offered to the public; and (ii) debt securities privately offered to professional investors. However, only one Chapter of the MBLR is dedicated to privately offered debt securities.

Requirements

The procedure for a private placement of bonds to professional investors is regulated by Chapter 37 of the MBLR.

The general qualifications for the debt securities offered to professional investors are:

• if the issuer is a corporate entity, it must have net assets of HK$100,000,000;⁴
• if the issuer is a corporate entity, it must have audited accounts for the two years before the listing application made at most 15 months before the intended date of the listing document;⁵
• the debt securities must be freely transferable;⁶ and
• the debt securities must be issued in denominations of at least HK$500,000 or equivalent in other currencies.⁷

The offering circular prospectus of the security that is prepared for the debt securities must contain information that professional investors would customarily expect to see, including the HKSE's standard disclaimer, issuer responsibility statement, and selling restrictions to professional investors only.⁸

The issuer must submit an application for eligibility to list on the HKSE with the required documents, and the HKSE will issue a letter advising the applicant on whether it and its debt securities are eligible for listing within 5 business days after receiving the application.⁹

The following documents should be produced and submitted to the HKSE:

• completed application from;
• listing fee;
• draft listing document;
• draft formal notice of listing; and
• other documents including company charter, agent appointment letter, powers of attorney and corporate authorization documents.¹⁰

The listing fee is from HK$10,000 to HK$90,000.¹¹

Conclusion

As you can see from the above-mentioned requirement, the main advantage of the debt securities offered to professional investors is that it offers a shorter timeframe for obtaining listing approval from the authorized listing committee and has simplified disclosure requirements. Further, it is more cost efficient compared to public offering. Any business considers issuing debt securities in financial market should be aware of the HKSE and the great opportunities it offers.

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1. https://valueinvestasia.com/introduction-to-the-hong-kong-stock-exchange/

2. https://www.hkex.com.hk/-/media/HKEX-Market/Market-Data/Statistics/Securities-Market/Funds-Raised-by-Type/fun_type_e.pdf

3. https://www.charltonslaw.com/hong-kong-law/introduction-to-listing-on-the-growth-enterprise-market-of-the-stock-exchange-of-hong-kong-limited/

4. MBLR Chapter 37, 37.05

5. MBLR Chapter 37, 37.06

6. MBLR Chapter 37, 37.09

7. MBLR Chapter 37, 37.09

8. MBLR Chapter 37, 37.27

9. MBLR Chapter 37, 37.36

10. MBLR Chapter 37, 37.35

11. MBLR Appenix 8

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