Securities and Futures Commission

1. Securities and Futures Commission Teachers Workshop - 2004 Stock Module – Elementary XYZ Company

2. Overview of Stocks • Definition – A certificate representing a unit of ownership in a company • Classification : • Ordinary vs. Preferred • Blue Chips • H share , Red Chips

3. Role of a Stock Exchange • Go public • A venue for raising funds • PRIMARY MARKET Companies • An open and public market for exchanging stocks • SECONDARY MARKET Stock Exchange Investors

4. Overview of the HK Stock Market • No. of listed companies as at Nov 04: • Main Board – 882 • Growth Enterprise Market (GEM)– 203 • As of Sep 04, total market capitalisation: HK$5,960.6B (Rank: 8th in the world, 2nd in Asia) • Average daily turnover in 04: HK$15.7B • According to SFC Retail Investor Survey 2003, 1.3M or 23.8% of HK adults aged 18 or above had invested in HK stocks during the last 2 years

5. Main Board: For more established companies with previous trading and profit records Growth Enterprise Market: For growth companies that may not have a track record of profits Stock Market – Primary Market • There are two markets on the SEHK New alternative listing criteria for Main Board companies

6. Stock Market – Primary Market • Roles of financial institutions • Sponsors • Underwriters • How does a company go public? • The most common way - Initial Public Offering (IPO) • Public subscription • Placing • Public subscription + Placing

7. IPO – Prospectus • Provides detailed information about the newly listed company • Summary • Timetable • Overview of the industry • Business • Future plans and prospects • Management details • Risk factors • Financial information • Use of proceeds

8. IPO – Subscription • Investors – How to subscribe for IPO shares? • Whitevs. Yellow vs. Pink application forms • EIPO • No multiple applications

9. IPO - Subscription

10. IPO – Share Allotment • Clawback mechanism for IPO of Main Board companies with both placing and public subscription tranches: • Check allotment results: • Main Board : Newspapers and HKEx website • GEM : GEM website

11. Means of application Application submitted to Refund cheques to be sent (or credited) to Allotted shares to be sent (or credited) to White form + cheque (payable to the receiving bank’s nominee) Drop-in box of a receiving bank Applicant’s address by mail Applicant’s address by mail (share certificates) Yellow form + cheque (payable to the receiving bank’s nominee) Drop-in boxes of a receiving bank Applicant’s address by mail Applicant’s Investor Participant Account or designated intermediary’s account in CCASS Application instruction + debit applicant’s account at intermediary Intermediary Intermediary Intermediary’s account in CCASS. EIPO using Investor Participant Account in CCASS (if this mode of application is available for the IPO) CCASS (via electronic means, e.g. IVRS, Internet) CCASS, which credits the applicant’s bank account Applicant’s Investor Participant Account in CCASS IPO – Distribution of Shares & Refund Cheques

12. IPO – Distribution of Shares & Refund Cheques • Special arrangements to allow collection of share certificates and/or refund cheques in person • Refund cheques printed with part of the applicants’ ID card numbers

13. IPO – Mind the Risks • If the IPO is over-subscribed, no shares may be allotted or you will only receive partial allotment of your application • Subscription on margin involves costs - profits may not offset the costs • Don’t assume that the share price must rise above the offer price on the 1st trading day • Mind the mailing risk and delay in receiving share certificates • Some intermediaries will only sell your share certificate after confirming its authenticity

14. Placing order Investors Stock Market – Secondary Market Order routing Stock brokers (Non- Exchange Participants) Order execution Stock brokers (Exchange Participants) Order confirmation & settlement Custody, clearing & settlement SEHK Trade data Investor Participant Account (Optional) HKSCC

15. Secondary Market – SEHK • Operates the trading system AMS/3 • Automatic order matching • Administers the Trading Rules and monitors compliance by its Participants • Disseminates stock market information to the market via information vendors

16. Hong Kong Securities Clearing Company Limited • Clearing and settlement via CCASS under an immobilised mode • Settlement cycle : T+2 at brokerage level

17. Hong Kong Securities Clearing Company Limited • Investor Participant Account : a stock custody account for investors with enhanced features • Moving towards scripless trading : • Investors can choose to hold or “dematerialise” their scrips • Register of Members – Certificated /Uncertificated shareholders • Progressive implementation

18. Stockbrokers • The “intermediation” role • Must be licensed by SFC • Regulated Activity (RA) 1 – Dealing in Securities • RA4 – Advising on securities • RA8 – Securities margin financing • An SFC licence is not a guarantee of future performance or quality of service • Beware of “boiler-room” operators

19. Listed Companies • Comply with the Listing Rules • On-going disclosure obligations • Price-sensitive information • Financial information – Annual, interim, quarterly (only for GEM companies) reports Failure to publish these reports on time will be subject to suspension • Corporate actions • “Notifiable” transactions

20. Listed Companies: Corporate Governance • New Listing Rules to enhance corporate governance • Directors and board practice • Notifiable and connected transactions • Financial reporting and disclosure obligation • Enhanced voting powers of shareholders

21. Share Registrars (股份過戶處) • Maintain the share register of a listed company • Help a listed company issue share certificates, distribute dividends and corporate documents to shareholders, etc Listed Companies Investors

22. Be a Smart Stock Investor • Find the right stockbroker • Know both your rights and obligations in dealings • Bank on facts, not rumours • Know your rights as a shareholder • Understand the risks of stock trading

23. Know Your Investments • Read the prospectus before you subscribe for a new stock • Read annual reports, shareholder circulars and company announcements to keep yourself up-to-date of the company’s developments • Don’t chase rumours • Herd investing is not smart investing

24. Your Rights as a Shareholder • Information rights • Voting rights • Pre-emptive rights – Rights issues • Entitlements – Dividends (cash / scrip), bonus shares, subscription warrants

25. Obligations of “Certain” Shareholders • Substantial shareholders • holding 5% or more of the voting shares of a listed company • should disclose their interests • Controlling shareholders • generally referred to those holding 30% or more of the voting shares of a listed company alone or together with concerted parties • may trigger a general offer under certain circumstances

26. What are the Major Risks of Stock Trading? • Higher expected return, higher risk • Watch out for possible risks: • Price risk • Business risk • Liquidity risk • Corporate misgovernance • Brokerage failure • Pooling risk of margin account • Investment scams

27. Regulatory Structure Investment Arrangements Licensed Corporations & Individuals (Stock brokers, Investment Advisors, etc) Takeovers & Share repurchases All participants in trading activities Hong Kong Exchanges & Clearing Ltd Stock Exchange of Hong Kong Ltd. Hong Kong Futures Exchange Ltd. SEHK Options Clearing House Ltd. Hong Kong Securities Clearing Company Ltd. HKFE Clearing Corporation Ltd. Clearing Participants Listing Matters, Exchange Participants Exchange Participants Clearing Participants Clearing Participants 25

28. How SFC Regulates the Stock Market A SFC Licensee Intermediaries Supervision Enforcement Investor Education Policy Making Licensing Regulation of Listed Companies

29. Licensing & Intermediaries Supervision • Single Licensing Regime under the SFO • 9 Regulated Activities • Licensed Corporations, Representatives and Responsible Officers • Registered Institutions • Risk-based supervisory approach • Monthly returns on Financial Resources Rules requirements • On-site inspections • Continuous Professional Training

30. Regulation of Listed Companies • Regulate takeovers, mergers and share buy-backs • Dual filing mechanism under the SFO • Extended powers to inspect documents of listed companies’ connected parties under the SFO • Oversee SEHK’s role as the front-line regulator of listing-related matters • Ensure the compliance of HKEx (#388), Stockmartnet (#8123) and Galileo Capital Group (#8029) with the Listing Rules

31. Enforcement • Monitor unusual market movements • Investigate and take action against market malpractice • market manipulation – e.g. marking the close,wash sales • insider dealing – e.g. a recent case was concluded with a total penalty of HK$0.24B • intermediary misconduct • listed companies’ suspected prejudicial or fraudulent transactions

32. Enforcement results

33. Enforcement results • Over the past 19 months, • More successful prosecutions on market manipulations with harsher penalties • Penalties - fine, community service/jail sentence, suspended custodial sentence • Publicly reprimand a licensee for selectively disclosing non-public price sensitive information • Impose the first disciplinary action against a research analyst for frontrunning research reports • Impose a jail sentence on a licensee who defrauded the SFC

34. Enforcement results • Over the past 19 months, • A number of prosecutions on cold-callers • A life ban on a licensee for re-entering the industry due to his attempted misappropriation of his client’s money • First dual filing successful prosecution - fine a listed company and its director for issuing an untrue announcement

35. Investor Education • Help investors get the facts • Highlight the pros and cons of different financial products and services • Give health warnings and explain the risks • Empower investors to protect themselves

36. The Way Forward • Combat corporate misgovernance • Currently, the SFC is not a single corporate regulator. Corporate activities are jointly regulated by: • ICAC (corruption) • Police (fraud, theft and other crimes which the SFC has no power over them) • Statutory backing of certain listing rules not only extends the dual filing system, but also empowers SFC to prosecute those who breach the relevant statutory sections of the listing rules