Chapter 13

Due Diligence Guidelines –

Internal Controls

6. Steps to be Taken When Material Deficiencies Remain Outstanding

6.1 Standard

Where these material deficiencies cannot be remedied prior to the submission of a listing application, a sponsor should make adequate disclosure as part of its submission of the listing application, including the nature of these deficiencies, reasons for non-rectification and remedial actions taken or to be taken. [Paragraph 17.3(b)(iii) of the Code of Conduct]

6.2 Recommended Steps

6.2.1 Where it is not practicable to remedy material deficiencies in respect of the listing applicant’s internal controls systems and procedures prior to the submission of the listing application, sponsors should disclose details of the relevant material deficiencies as part of the listing application submission, including:

(i) details of the nature of the deficiencies;19

(ii) reasons for the non-rectification of the deficiencies identified prior to the submission of the listing application; and

(iii) the remedial actions to be taken by the listing applicant to address the material deficiencies.

The sponsor may also consider including, where relevant, disclosure of the potential financial and operational impact of the material deficiencies on the listing applicant.

6.2.2 The sponsor should also explain why it believes that the listing applicant is still suitable for listing despite any material deficiencies that cannot be remedied prior to listing.20

6.2.3 Where appropriate, the sponsor should seek guidance from the Regulators.21

6.2.4 Sponsors should also refer to Chapter 31 “Due Diligence Guidelines – Dealing with “Material Deficiencies” of the Listing Applicant”.

Endnotes

19. Sponsors should note paragraph 22(iii) of Exchange Listing Decision LD48-2013. In this decision relating to a company with non-compliance incidents, one of the factors taken into account by the Stock Exchange in rejecting the listing application was the failure of the listing applicant to include sufficient disclosure in the listing document of rectification measures and internal controls which were aligned to the non-compliance incidents.

Similarly, in Exchange Listing Decision LD92-2015, one of the reasons cited by the Stock Exchange for rejecting a listing application was insufficient information on how and whether newly implemented internal control measures were effective to prevent future breaches.

20. Paragraph 99 of the Consultation Conclusions on the Regulation of Sponsors. It should be noted that the Stock Exchange normally expects Material Non-compliances to be fully rectified before listing unless the rectification is not applicable or possible. See Exchange Guidance Letter GL63-13 and endnote 6 above details for the expected disclosures.

21. Paragraph 99 of the Consultation Conclusions on the Regulation of Sponsors.