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The Stock Exchange of Hong Kong Limited (the “Exchange”) published on 29 January 2016 the fourth report on the findings and recommendations from its review of issuers’ annual reports. This review covers annual reports for the financial year ended in December 2014 (the “Dec 2014 Review”) and focuses on issuers’ compliance with the Listing Rules, corporate conduct and disclosure of material events and developments.
The Exchange noted that while a vast majority of issuers continue to comply with the Listing Rules in the areas reviewed last year, there are areas where some issuers did not fully follow the relevant guidance on best practices. The Exchange specifically draws issuers’ attention to some of those areas where they should improve their practices.
Areas covered in the Dec 2014 Review
The Dec 2014 Review covered the following areas:
*New areas of review not covered last year
Specific areas where issuers should improve their practices
The Exchange specifically draws issuers’ attention to the following areas where they should improve their practices:
Continuing connected transactions
During the Exchange’s review, it has obtained copies of the minutes of audit committee (or appropriate committee) of selected issuers to consider whether independent directors were given sufficient information to discharge their duties in monitoring issuers’ continuing connected transactions. These minutes were normally attached with reports prepared by the issuers’ management and/ or external auditors. The Exchange noted that such reports did not cover the work done by the management to ascertain, and so it is unclear how the independent directors had assessed, (a) whether the transactions have been conducted in accordance with the pricing policies or mechanisms under the framework agreement (including the pricing range, the process for estimating the selling prices for the goods or services, and the procedures for obtaining quotations or tenders, as appropriate); and (b) whether the issuer’s internal control procedures are adequate and effective to ensure that transactions are so conducted.
Contractual arrangements adopted by issuers
A vast majority of issuers adopting contractual arrangements did not follow the Exchange’s Guidance Letter (GL77-14) to make disclosures in their annual reports in respect of their material business operations through these arrangements.
Disclosure of significant changes to issuers’ financial performance and reliance on key customers in the MD&A section
The Exchange noted that there is general improvement in the MD&A disclosures in the areas reviewed. However, many issuers have not disclosed:
The Exchange recommended in its previous reports that issuers should provide meaningful updates in their annual reports on the actual use of proceeds from equity fundraising, including details of the application and a breakdown of how the funds were allocated among different uses. Only approximately half of the issuers disclosed specific details of the use of proceeds in annual reports.
Share option schemes
The Exchange noted that issuers generally complied with the specific disclosure requirements for their share option scheme. However, there is a common omission in relation to the total number of securities available for issue under the schemes together with the percentage of issued shares that it represents as at the date of annual report.
Exchange’s next review
The Exchange’s next review will cover annual reports for the financial year ended between January and December 2015, and the Exchange intends to cover most of the areas covered in the Dec 2014 Review, in particular continuing connected transactions will continue to be an area of focus.
Issuers are reminded to note the observations and recommendations discussed in the Exchange’s report and follow the relevant guidance to avoid the need to issue clarification or supplemental announcements subsequent to the publication of their annual reports to make further disclosures at the request of the Exchange.
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