CHINA: CSRC Publishes FAQ on Beneficial Ownership under SH-HK Stock Connect

Wednesday May 18 2016

The Chinese Securities Regulatory Commission (CSRC) has published a FAQ on their website, which further clarifies their interpretation of “beneficial ownership” under SH-HK Stock Connect.

In response to the first Q&A, concerning proprietary interests, the CSRC clarifies that under Article 13 of the CSRC Stock Connect Rules, Northbound “investors are legally entitled to the rights and benefits of shares acquired through the Northbound Trading Link”, and accordingly CSRC Stock Connect Rules have expressly stipulated, in Northbound trading, overseas investors shall hold SSE Securities through HKSCC (Hong-Kong Securities Clearing Company) and are entitled to proprietary interests in such securities as shareholders.

Foreign investors are able to exercise their rights over SSE securities acquired through the Northbound Trading Link and held though the HKSCC in accordance with the laws and regulations of the HKSAR (Hong-Kong Special Administration Region) regarding nominee holders. Pursuant to CCASS Rules and CCASS Operational Procedures, beneficial owners of SSE securities shall exercise their rights over such securities through HKSCC as the nominee holder, which includes the following rights:

• The right to call and participate in shareholders meetings;
• The right to propose matters and exercise voting rights at shareholders meetings; and
• The right to receive dividends from investment

The Regulator, in FAQ number 3, has clarified that Foreign investors have the right to legal action in China’s courts, provided the “overseas investor can provide evidential proof of direct interest as a beneficial owner, the investor may take legal actions in its own name in Mainland courts”.

Certification of holdings of SSE securities issued by HKSCC will be recognised by CSRC, provided they comply with laws and regulations of the HKSAR.

The legal certainty and enforceability of the rights of northbound investors holding A-shares bought via the Stock Connect, has been a concern among foreign investors. Clarification was provided in this regard in January 2016, whereby the Hong-Kong Exchange stated that beneficial ownership is part of both Hong-Kong law and Mainland China law, and “investors retain proprietary rights in the A-shares held through the HKSCC, a wholly owned subsidiary of HKEx, even if HKSCC were to become insolvent”.

Click on the link above for further details.