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Following is a question by the Hon Albert Ho and an oral reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (March 1):
Question:
It has been reported that in November last year, Pacific Century Insurance Holdings Limited, a listed company, announced profits of about $105 million for the first three quarters as at end of September last year. Following the suspension of trading of its shares in January this year, the company announced that, as it had not applied the new accounting standards, it had made an error in reporting its profits, and the actual profits should be $8.01 million, representing a drastic reduction of 92% as compared to the amount previously announced. In this connection, will the Government inform this Council:
(a) of the total number of cases in the past three years involving announcements of incorrect or misleading price sensitive information by companies listed in Hong Kong with subsequent amendments made; the investigations carried out by the authorities in respect of these cases and the number of cases in which the listed companies concerned were penalised or prosecuted by monitoring bodies;
(b) whether it has assessed the impact of the above cases on the reputation of Hong Kong as an international financial centre as well as the interests of investors; if it has, of the assessment results; and
(c) how it will prevent the recurrence of similar cases and whether it will consider amending the relevant legislation, with a view to strengthening controls (such as imposing heavier penalties, introducing a fine system and allowing investors to claim compensation) and providing for "the investors' right of derivative action", so as to allow minority shareholders to take legal actions on behalf of listed companies against the management and defaulters concerned?
Reply:
Madam President,
(a) Under the existing regulatory regime, the Securities and Futures Commission (SFC) is the regulator of the securities market and is responsible for the regulation of the market and enforcement of relevant statutory requirements. The Stock Exchange of Hong Kong (SEHK) is the front-line regulator of the market. All companies listed on the SEHK must comply with its Listing Rules. The Listing Rules stipulate the requirements for initial public offerings and continuing obligations of listed companies including ongoing disclosure of price-sensitive information. When there is a breach of the Listing Rules of the SEHK such as disclosure of false or misleading price-sensitive information, the SEHK may request the concerned listed company to clarify. The SEHK may also impose non-statutory sanctions such as public censure and a public statement which involves criticism etc.
Separately, under the Securities and Futures (Stock Market Listing) Rules which came into effect in April 2003, listed companies are required to file with the SFC a copy of any announcement, circular or other document issued under the Listing Rules. Under sections 182 and 384 of the Securities and Futures Ordinance (SFO), if a person knowingly or recklessly provides false or misleading information in the statutory filing with the SFC, the SFC may exercise its statutory power to conduct investigation and gather evidence. A person who breaches these sections shall be liable to criminal fines and imprisonment.
According to the information provided by the SEHK, during 2003 and 2005, there were about 1,000 listed companies. The SEHK has conducted investigation into 38 suspected cases involving disclosure of false or misleading price-sensitive information by listed companies. Listed companies involved in all these 38 cases subsequently made clarifications. Persons concerned in four of these cases were sanctioned by the SEHK.
According to the information provided by the SFC, since April 1, 2003, the SFC has conducted investigations into 22 suspected cases of disclosure by listed companies in breach of section 384 of the SFO, and has instituted prosecution in three cases. The parties involved in two of these cases have been convicted.
(b) We certainly do not want to see cases like this taking place in Hong Kong. However, this is only an isolated case. In fact, the position of Hong Kong being an international financial centre has been built on solid foundation. Both overseas and local investors have full confidence in our market, which is evidenced from the active turnover of Hong Kong stock market. Last year, the market turnover, amount of initial public offering equity funds raised and the market capitalisation all reached record high. The total market turnover amounted to HK$4,520.4 billion in 2005. The market capitalisation exceeded HK$9,000 billion in February this year. Even overseas investors cast a vote of confidence in Hong Kong's market: overseas investors have constantly contribute to 35% to 40% of Hong Kong's stock market turnover. It can be seen from the above that Hong Kong's position as an international financial centre is secure as ever. However, we will not be complacent, and will continue with various improvement measures to ensure that our regulatory regime is conducive to the development of a quality market which is fair, open and transparent.
(c) In fact, the existing system has already provided investors with a lot of protection. In respect of investors' claims for compensation, under section 281 of the SFO, a person who has sustained any pecuniary loss as a result of a relevant act in relation to market misconduct committed by another person can claim compensation from the person concerned by exercising the right of civil action. Such market misconduct includes disclosure of false or misleading information to induce the purchase or sale of securities by another person.
As regards derivative action instituted by investors, the relevant provisions in the Companies (Amendment) Ordinance 2004, which came into effect on July 15 last year, have significantly enhanced shareholders' remedies, including allowing minority shareholders to bring statutory derivative actions on behalf of the company against wrongdoers in relation to the company. The Ordinance also empowers the court to award damages to company members whose interests have been unfairly prejudiced.
As regards sanctions, under sections 277 and 298 of the SFO, market misconduct takes place when a person discloses, circulates or disseminates information that is likely to induce the purchase or sale of securities by another person if he knows that, or is reckless or negligent as to whether, some information is false or misleading. The person concerned shall be subject to civil sanctions by the Market Misconduct Tribunal or criminal prosecution. The civil sanctions that may be imposed by the Market Misconduct Tribunal include disgorgement order and disqualification order, etc. If the person is prosecuted and convicted, he may be liable to a fine of HK$10,000,000 and to imprisonment for 10 years.
To further strengthen the position of Hong Kong as an international financial centre and protect investors' interests, we will continue to work closely with the regulators in improving the regulatory regime. One of the key initiatives is to give statutory backing to major listing requirements so that the SFC can impose civil sanctions on listed companies as well as their directors and officers for breaches of the statutory listing rules. Or such breaches may be brought to the Market Misconduct Tribunal for civil proceedings or be subject to criminal prosecution.
To further enhance the quality of financial reporting by listed companies so as to safeguard the interests of investors, the Government introduced the Financial Reporting Council Bill into the Legislative Council last June to set up the Financial Reporting Council (FRC). The FRC will be responsible for investigating the professional misconduct committed by auditors of listed companies and collective investment schemes, and enquiring into the financial reports of such companies and schemes to see if they comply with the relevant legal, accounting or regulatory requirements. The Administration will continue to give full support to the Bills Committee of the Legislative Council in scrutinising the Bill so that the FRC can be established as soon as possible. We expect that after the establishment of the FRC, independence of investigation can be strengthened. As this independent investigatory body will be vested with more effective statutory investigative powers, the effectiveness of investigation and hence the quality of financial reporting by listed companies can be enhanced.
Thank you, Madam President.
Ends/Wednesday, March 1, 2006
Issued at HKT 12:11
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