SFC unveils new risk tests for infrastructure listings

Mindful of potential spike in infrastructure listings from Belt and Road activity, regulator tightens up risk screening for applicants

As the vast, pan-Asian One Belt, One Road initiative takes shape, the Hong Kong Securities and Futures Commission (SFC) has predicted that there will be a surge of listings for firms working in the infrastructure field.

To pave the way for that trend, the regulator has unveiled a new series of tests that it will use to gauge applicants’ risk potential.

In an 11 April statement, the watchdog pointed out that any infrastructure firm typically gives rise to “special investment risks” that reflect the nature – or location – of its project.

“There would need to be prominent disclosure of such risks in the [firm’s] prospectus in any event,” it said. “But the risks associated with such projects may be sufficiently concerning that they cannot be addressed by disclosure alone.”

However, it noted: “if, despite these risks, there are sufficient risk mitigation factors, the SFC will take [them] into account when reviewing the proposed listing.”

The four, main questions that the SFC will explore as the number of Belt and Road infrastructure applicants increases are:

1. Does the firm have a large shareholding by either a) a relevant, state-owned enterprise in mainland China, b) a sovereign wealth fund, c) a substantial listed company, or d) a substantial and globally active institutional investor?
2. Is a sizeable mainland, development or international bank committed to providing ongoing project finance?
3. Has the firm secured direct involvement or shareholding by the government of the state in which the project assets are located?
4. Is the project located in a jurisdiction that has signed up to the Multilateral Memorandum of Understanding drafted by the International Organisation of Securities Commissions? Or, if that is not the case, is there sufficient comfort that the SFC can obtain relevant public and non-public information about the activities of the company in the jurisdictions where it operates?

That comfort, the regulator said, could be based on either:

• a bilateral memorandum of understanding between the SFC and the overseas securities regulator;
• whether the listed holding company is incorporated in Hong Kong;
• whether the firm’s books and records are kept in Hong Kong; or
• whether it has any Hong Kong-resident directors.

“Generally speaking,” the statement noted, “the more of these factors are present, the lower the perceived level of potential risk to the investing public.

“Listing applicants should also consider whether the requirements set out under the joint policy statement regarding the listing of overseas companies issued by the SFC and the Stock Exchange of Hong Kong in 2013 are applicable.”

SFC chief executive Ashley Alder said: “Hong Kong’s international profile and reputation as a venue for capital raising has put it in an excellent position to take advantage of the opportunities presented by the Belt and Road Initiative.

“The SFC has a pivotal role to play in helping to establish investor confidence in large-scale Belt and Road projects and we look forward to working with the industry to make them a success.”