CSRC clarifies beneficial ownership rules on Connect
Foreign investors enjoy proprietary rights in their A-share holdings under Stock Connect, the Chinese securities regulator has confirmed.
In an official clarification of the issue of beneficial ownership, which has plagued the cross-border trading link since its launch, the regulator late last week provided an FAQ to address concerns.
The move has been welcomed as providing certainty to investors, some of whom have been deterred from using the link because of the opaque regulatory framework.
The China Securities Regulatory Commission (CSRC) issued answers to a series of frequently-asked questions on beneficial ownership last Friday evening.
The regulator provided a clarification of the Administrative Measures for Registration and Settlement of Securities (Settlement Measures) that the concept of “nominee shareholding” will be recognised under Chinese law. As a result, foreign investors who hold Shanghai-listed stock through the Hong Kong Securities Clearing Company (HKSCC) are entitled to proprietary interests in such securities as shareholders.
Importantly, the CSRC confirmed details for identifying beneficial owners and the execution of shareholders’ legal rights. In order to identify the beneficial owner of Shanghai-listed securities under the trading link, an HKSCC-issued certificate confirming the holder as the beneficial owner will be treated as lawful proof, and the certification will comply with Hong Kong laws and regulations.
“The primary roadblock for overseas retail funds’ participation in Stock Connect is being removed,” said Sandra Lu, partner at Shanghai-based law firm Llinks. “It is foreseeable that there will be a robust growth of participation in Stock Connect by retail fund afterwards.”
Sally Wong, chief executive of the Hong Kong Investment Funds Association (HKIFA), welcomed the move. “Having clarity and certainty about beneficial ownership is pivotal as it is the cornerstone of investor protection,” she said. The clarifications were “very important” and complemented those issued by Hong Kong Exchanges and Clearing (HKEx), Wong said - for example, the recognition of certification to verify shares ownership would provide greater certainty and comfort to depositaries regarding their obligation to ensure the ownership rights of Ucits funds.
“We are confident that with these amendments and the continuing fine-tuning of the SPSA (special segregated accounts) system, more and more international investors will be able to participate in the Stock Connect,” Wong said.
“The complementary FAQs pave the way for the launch of the Shenzhen Connect,” said Wong, in reference to the long-awaited extension of Stock Connect to Shenzhen markets.
Beneficial ownership has been foreign investors’ biggest concern since Stock Connect launched in November last year. Under the trading link’s mechanism, Shanghai-listed shares are held in a separate account controlled by HKSCC on behalf of investors, which raised concerns about the ambiguity of share ownership since the securities were neither HKSCC’s asset nor owned by the investors.
The issue has been particularly relevant for Ucits funds investors who domiciled their funds in the European Union because the Luxembourg and Ireland regulators have strict requirements on ownership and asset segregation. More than 85% of investors cited it as the top issue that needed to be resolved, an HKIFA survey revealed in January.
In terms of execution, foreign investors exercise their shareholder rights as the nominee holder, following the central clearing and settlement system (CCASS) rules and procedures issued by HKSCC.
In addressing the right to legal proceedings, the CSRC said Chinese laws do not provide it nor prohibit a beneficial owner from pursuing it.
Yet the regulator provided two legal interpretations on the matter, saying that the HKSCC as a nominee holder may take legal action on behalf of overseas investors. The Hong Kong bourse amended the “FAQs for investor” document in late March, saying HKSCC will assist the CCASS participant or its client in bringing legal action in China if a CCASS participant requests it.
The regulator also said that if a foreign investor could provide evidential proof of direct interest as a beneficial owner, the investor could take legal action in mainland Chinese courts in its own name, according to the Civil Procedure Law.
In April, the Hong Kong bourse launched the SPSA system for Stock Connect in an attempt to address the issue of pre-trade checking rules. However, it received mixed reviews in part because investors claimed the lack of synchronised cash settlement had created counterparty risks.