The Hong Kong stock exchange plans to become a fully electronic and paperless bourse, starting with the process for initial public offerings from 2022, according to a consultation paper issued on Monday.
Bourse operator Hong Kong Exchanges and Clearing, the city’s Securities and Futures Commission and the Federation of Share Registrars are collecting views on the proposal until April 27.
Confirming a report by the South China Morning Post two weeks ago, the plan is aimed at making Hong Kong’s stock market more competitive and brings it in line with international standards. Paper listings subscriptions have been abandoned by many exchanges globally.
Under the proposal, investors will be able to hold securities without any paper documents, opening and managing their accounts online. The company will send any necessary documents or annual reports electronically to the investors.
There will be two types of account, one tailor-made for retail investors and the other for institutional investors, each with a different technical structure to meet their needs.
The Federation of Share Registration is exploring the feasibility of building a web-based common platform across share registrars to allow investors to manage their electronic shareholding records.
“First, we propose gradually requiring all IPO securities to be in uncertificated form only,” the consultation paper said. “We will start first with shares in Hong Kong companies, and then progress to other shares and securities.”
The regulator will propose a date, which is not yet fixed, after which it will no longer accept any paper applications or cheques as part of the IPO process, only electronic transactions.
As it will require a change in the law and time to set up the new system, the consultation document estimates the implementation of the paperless bourse will happen in early 2022.
Gary Cheung Wai-kwok, the chairman of industry body Hong Kong Securities Association, supports the proposal. “Turning the Hong Kong stock market into a paperless bourse will enhance trading and the efficiency of settlements. It will also enhance the competitiveness of the local market,” he said.
The switch to a paperless, fully electronic bourse will also cut the lag between the close of an IPO and the first trading day, from five days now to two days. It will also allow for trading to start the day after pricing, instead of the current waiting period of five days.
Hong Kong has for the past two decades used a hybrid system that allows for paper as well as internet-based IPO subscriptions. The proposed change will end the paper application channel and scrap the need for listed issuers to print and mail share certificates to investors.
But this does mean the bourse will need to take care of its older patrons. Cheung Tin-sang, 80, a stockbroker who has traded on behalf of local clients for 60 years, said: “Some of the older investors like to keep their share certificates at home. The stock exchange should not force them to give up their certificates.
The Hong Kong Securities Association’s Cheung said: “It will be good for the HKEX to introduce such moves step by step. Making the IPO process purely electronic should not meet much opposition.
“As far as share certificates go, the HKEX may need to educate older investors to accept the idea that it is safe to have their stock holdings turn digital,” he added.