Risk factor disclosure often takes up a length in a prospectus, but it would be contrary to the basic philosophy of corporate governance to remove the requirement to disclose China-related risk factors from IPO documents.

Risk factor disclosure often takes up a major part of an IPO prospectus. It would contravene basic corporate governance to remove China-related risk factors from IPO documents


By Ricky Lai

The Hong Kong Exchanges and Clearing Ltd. (HKEx) amended its listing rules on Aug. 1, removing a requirement for applicants to disclose China-related risks in their initial public offering (IPO) documents due to differences in regulations between the Chinese Mainland and Hong Kong. Such discrepancies could arise from differences in China-related laws and regulations, its political structure and economic environment, foreign exchange controls and exchange rate risks, as well as other specific risks of doing business in China.

It’s well known that risk factor disclosure often takes up a lengthy part of IPO documents. The new measure would reduce disclosure requirements for companies, which, in the author’s view, is contrary to the basic philosophy of corporate governance.

How would the newly revised exemption affect the Hong Kong financial market? Using corporate governance as a reference point to balance the pros and cons, this article aims to provide some advice to IPO applicants and listed companies.

Most Hong Kong-listed companies do business in Mainland China, and some IPO applicants are also incorporated there. Exemption from disclosing their China-related risk factors lets companies focus more on disclosing risks specific to their particular business. Therefore, I suggest that listing applicants enhance the transparency of information in different areas of corporate governance by, for example, strengthening their disclosure of discussion related to economic, national and global development, social, technology transformation, environmental and other ESG risk factors, to strengthen investor and shareholder confidence.

More active information disclosure

Exemptions from disclosing China-related business risk factors may lower understanding of listed companies, making investors more hesitant in their decision making. That’s why from a corporate governance perspective, enhancing information transparency, especially for companies that rely heavily on the Chinese market, may improve investors’ understanding of a company’s development potential and related potential risks.

Even if they’re exempt from disclosing their China-related risk factors, companies can consider disclosing more internal and external factors other than their China-related business risks. In the prospectus, they can actively disclose their risk mitigation measures, such as risk assessment as part of risk management, and more actively monitor high-risk factors, and demonstrate that relevant measures have been put in place to mitigate the relevant risks.

International investors may also have concerns about disclosure standards for Hong Kong, which may discourage them from investing in the market. To respond to such concerns, for example, companies can proactively provide a full range of information during their IPO roadshows. They can also consider issuing regular voluntary announcements to disclose the latest status of their business, listing out operational risk factors and disclosing measures to proactively monitor the risks upon completion of the IPO.

Risk factors are not limited to China but are also a global issue. Therefore, the clearer and more detailed the risk factors disclosed, the more confident investors will be and the more positive the signals will be for the company’s share price in the long run.

The Hong Kong Securities & Futures Commission (SFC) and HKEx should also strengthen measures to enhance regulatory standards. Regulators need to take other measures to ensure market stability and transparency to ensure that the level of regulatory scrutiny of disclosure responsibilities has not been reduced. For example, the SFC could strengthen its regulation of listed companies’ legal responsibilities for disclosure of insider information under the Securities and Futures Ordinance, including price sensitivity of any Chinese or non-Chinese business risk factor information that could have a potential material impact on the company’s share price.

The above are my suggestions on the possible impact of removing the China-related business risk disclosure requirement. Specific ramifications still vary among listed companies’ own corporate governance framework, and feedback from investors and regulatory monitoring measures may also play a role.

Mr. Ricky Lai is a company secretary of a company listed on the main board of the Hong Kong Stock Exchange and a part-time lecturer of various tertiary institutions in Hong Kong

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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