Hong Kong Stock Exchange has revised and published the “Listing Rules”, introducing a new inventory stock mechanism, where repurchased shares by Hong Kong-listed companies will no longer be mandatory for cancellation. The new regulations on inventory shares officially came into effect on June 11th.
Inventory shares refer to non-negotiable shares repurchased by listed companies and held in inventory for future resale.
Under the new mechanism, listed companies are allowed to hold repurchased shares in inventory. Inventory shares cannot be sold within 30 days of repurchase, and once sold, companies are prohibited from repurchasing within the following 30 days. Additionally, selling inventory shares is prohibited within 30 days before the disclosure of insider information, earnings announcements, or when the trading parties are identified as core related persons.
Furthermore, the sale of new shares by newly listed companies with inventory shares must comply with the same lock-up provisions as issuing new shares. Inventory shares do not enjoy voting rights. Listed companies are required to disclose their intention on whether the repurchased shares will be canceled or retained as inventory shares.
Previously, to prevent companies from manipulating the market or engaging in insider trading through frequent repurchases and resale of inventory shares, the Hong Kong Stock Exchange’s former “Listing Rules” did not allow for the existence of inventory shares, requiring repurchased shares by Hong Kong-listed companies to be canceled.
Local media noted that the previous rules of Hong Kong Stock Exchange on repurchases had various restrictions, including stringent time limits, minimum public shareholding requirements, and a prohibition on issuing new shares within 30 days after repurchasing.
Industry professionals have expressed that despite the Hong Kong government’s affirmation that the new system will enhance the competitiveness of the local listing system, market participants will need time to understand the terms of the new rules. It is expected that the initial response to the operation of the mechanism may not be very enthusiastic.