HKSI Licensing Examination Paper 8 (Securities) — All Questions

Following the introduction of HKEX's FINI platform, the time from IPO pricing to the start of trading has been:

• a.Lengthened to about ten business days to allow fuller allocation checks
• b.Shortened, with the IPO settlement cycle cut to about two business days (T+2)✓
• c.Left completely unchanged from the previous manual arrangements
• d.Made irrelevant, since settlement of new issues is now instantaneous

The FINI (Fast Interface for New Issuance) platform digitised and streamlined the IPO settlement process, cutting the gap between pricing and trading from around five business days to about two (T+2), reducing the period that applicants' funds are locked up.

Since Hong Kong abolished the concept of par (nominal) value for shares, newly issued shares:

• a.Must always be issued at a price below their prevailing market price
• b.Can no longer be issued at any premium above their nominal value
• c.Have no par value, and proceeds are simply credited to share capital✓
• d.Must all be issued at a nominal value of exactly HK$1 per share

Under the Companies Ordinance, Hong Kong shares have no par value; the entire subscription price is credited to the company's share capital account, and older concepts such as share premium and issuing 'at a discount to par' no longer apply.

A controlling shareholder of a newly listed Main Board company is generally subject to a lock-up that, in the first six months after listing:

• a.Requires the shareholder to sell down the entire holding to the public
• b.Permits them to sell freely with no restriction of any kind
• c.Prohibits them from disposing of their shares in the company✓
• d.Compels them to buy additional shares in the company each month

To align interests and support market confidence, a controlling shareholder generally may not dispose of any shares during the first six months after listing, and in the following six months may not dispose of shares if it would cause them to cease being a controlling shareholder.

The SFC transaction levy and the AFRC (accounting regulator) levy charged on Hong Kong share trades are:

• a.Payable only on the initial application for shares in an IPO
• b.Fully refundable to the investor whenever the trade closes at a loss
• c.Discretionary charges that each broker may set at its own commercial rate
• d.Statutory levies charged on both the buyer and the seller to fund the relevant regulators✓

These are ad valorem statutory levies charged on both sides of a transaction to fund the SFC and the accounting/financial-reporting regulator respectively. They are small percentages of the consideration and are collected via the broker alongside stamp duty and the Exchange trading fee.

A 'grey market' in an IPO share refers to trading that:

• a.Occurs unofficially before the shares officially begin trading on the Exchange✓
• b.Takes place approximately ten years after the company first lists
• c.Is conducted solely by the regulator to establish a fair opening price
• d.Amounts to illegal insider dealing in each and every instance

The grey market is unofficial, off-exchange dealing in newly issued shares in the short window after pricing but before official listing. It gives an early indication of demand and likely opening price but settles outside the Exchange's normal facilities.

The default allocation to the public (retail) tranche in a typical Hong Kong IPO, before any clawback, is commonly:

• a.Exactly 50% of the offer in every case regardless of demand
• b.Around 10% of the offer, with the rest in the placing tranche✓
• c.Nil, with no shares at all made available to the public
• d.The full 100% of the offer, leaving nothing for the placing tranche

In a typical structure the public offer starts at about 10% of the total, with roughly 90% in the placing tranche; the clawback mechanism then raises the public portion (for example to 30%, 40% or 50%) as retail oversubscription increases.

The core function of the primary market is to:

• a.Channel new capital from investors to issuers through the issue of new securities✓
• b.Clear and settle trades that have already been completed on the Exchange
• c.Supervise and enforce the conduct standards of listed companies
• d.Let investors trade already-issued, second-hand securities among themselves

The primary market is where issuers raise fresh capital by selling newly created securities (via IPOs, rights issues, placings and bond issues); the proceeds go to the issuer. Subsequent trading of those securities takes place in the secondary market.

A 'scrip dividend' option offered to shareholders allows them to:

• a.Take new shares instead of a cash dividend✓
• b.Convert their ordinary shares into fixed-rate bonds
• c.Receive double the normal cash dividend for that period
• d.Sell their shares back to the company at a fixed premium

A scrip dividend lets shareholders elect to receive additional new shares in place of the cash dividend, allowing the company to retain cash while giving investors a way to increase their holding without paying brokerage or stamp duty on a market purchase.

The 'book close' (record date) period set by a listed company is used to:

• a.Determine the rate of ad valorem stamp duty on the shares
• b.Fix the final offer price of a forthcoming new share issue
• c.Determine which registered shareholders qualify for an entitlement such as a dividend or the right to vote✓
• d.Suspend all secondary-market trading in the company's listed shares for a full calendar month while the register is being updated

During the book close the share register is frozen so the company can identify the shareholders of record entitled to a dividend, bonus, rights or the right to attend a meeting. Buyers must settle before the record date to appear on the register in time.

The CCASS settlement (custody/stock) fee charged on transactions is typically:

• a.A charge levied only on the selling side of each transaction
• b.An amount set to be exactly equal to the stamp duty on the same trade
• c.A small percentage of value subject to a minimum and maximum dollar amount per instruction✓
• d.A flat charge of one percent of the trade value with no upper cap

The CCASS instruction/settlement fee is an ad valorem charge (a small fraction of the transaction value) but is bounded by a minimum and a maximum dollar amount per instruction, so it stays modest even on very large trades. It is separate from stamp duty and the Exchange trading fee.

An investor applies for HK-listed IPO shares using an IPO margin (financing) facility. The main extra cost compared with a cash application is:

• a.A higher rate of ad valorem stamp duty on the allotted shares
• b.Interest charged on the money borrowed to fund the application✓
• c.A doubling of the offer price payable for each allotted share
• d.A capital gains tax levied on any listing-day profit realised

IPO financing lets an applicant borrow to apply for far more shares than their own cash allows, but interest accrues on the loan regardless of how many shares are finally allotted. In a heavily scaled-back allocation the interest can outweigh any listing gain.

Which statement about a bond issued in the primary market is correct?

• a.The bondholder thereby becomes a part-owner of the issuing company
• b.The bond can never be bought or sold again once it is issued
• c.The issuer receives the proceeds and takes on an obligation to pay interest and repay principal✓
• d.The issuer receives no money at all from making the bond issue, since the proceeds are paid instead to existing bondholders

A primary bond issue raises debt capital: the issuer receives the proceeds and must pay the agreed coupons and repay the principal at maturity. Bondholders are creditors, not owners, and the bonds can subsequently trade in the secondary market.

'Price discovery' in the secondary market refers to the process by which:

• a.Brokers collectively agree a single fixed price for the year ahead
• b.The issuing company decides how large a dividend to declare
• c.The regulator officially sets and publishes each share's price every day
• d.Continuous buying and selling reveal a market-clearing price reflecting available information✓

Price discovery is the way the interaction of many buyers' and sellers' orders continuously establishes the current market price, incorporating new information as it arrives. A liquid, transparent secondary market makes price discovery more efficient.

A 'special limit order' on SEHK differs from an enhanced limit order in that a special limit order:

• a.Can match at up to its specified price across queues but is not queued in the order book if unfilled✓
• b.Is a facility made available only to registered market makers
• c.Guarantees that the whole quantity of the order will be executed in full at or within the specified limit price
• d.Can only be entered and matched during the pre-opening auction

A special limit order will match against as many price queues as possible up to (and including) its limit price, but any unfilled balance is cancelled rather than left resting in the order book. This suits investors who want an immediate fill up to a price limit without leaving a residual order.

A company makes a five-for-one subdivision (stock split), turning each share into five shares. The likely purpose is to:

• a.Repay outstanding debt owed to the company's bondholders
• b.Increase the total net asset value of the company overall
• c.Raise a significant amount of fresh capital from its shareholders
• d.Lower the price per share to improve marketability and liquidity✓

A subdivision multiplies the number of shares and proportionately cuts the price per share, without raising money or changing total value. A lower per-share price and smaller board-lot cost can make the shares more accessible and liquid for retail investors.

For a Main Board listing, SEHK requires a minimum number of shareholders on listing so as to ensure an open market. This requirement is generally:

• a.Exactly 10 shareholders holding the public float between them
• b.No minimum number of shareholders is imposed at listing
• c.At least 300 shareholders (with limits on concentration among the largest holders)✓
• d.At least 10,000 shareholders across the whole issued share capital

The Listing Rules require a sufficiently spread shareholder base, generally at least 300 holders for a Main Board issue, with limits on how much of the public float the largest few may hold. This supports liquidity and an orderly secondary market.

'Dematerialisation' of securities, which Hong Kong is progressively adopting, means that securities are:

• a.Held only as physical paper certificates lodged with a custodian
• b.Permanently withdrawn from the market and cancelled by the issuer
• c.Converted from shares into an equivalent amount of cash on deposit
• d.Held and transferred in purely electronic (book-entry) form without paper certificates✓

Dematerialisation removes the need for physical certificates: legal title is recorded and transferred electronically. It reduces the risks and delays of handling paper (loss, forgery, slow transfer) and builds on the immobilisation already achieved within CCASS.

An investor buys 5,000 shares at HK$40.00 in the secondary market. Ignoring rounding, the ad valorem stamp duty at 0.1% on this purchase is:

• a.HK$20, taking the duty as 0.01% of the consideration
• b.HK$200✓
• c.HK$2,000, taking the duty as 1% of the consideration
• d.HK$800, taking the duty as 0.4% of the consideration

The consideration is 5,000 x HK$40.00 = HK$200,000. Stamp duty at 0.1% = HK$200 (rounded up to the nearest dollar). The same 0.1% would apply again on a later sale of the shares.

'Book entry' settlement in CCASS means that on settlement the transfer of shares is effected by:

• a.The company formally amending its articles or memorandum of association
• b.Issuing brand-new shares to the buyer directly from the company
• c.Physically posting the paper share certificates to the buyer by courier
• d.Debiting the seller's and crediting the buyer's stock accounts electronically✓

Book-entry settlement moves securities by electronic accounting entries: the seller's CCASS stock account is debited and the buyer's is credited, with no movement of paper. This is faster, cheaper and safer than physical delivery of certificates.

Money settlement for CCASS transactions is generally effected:

• a.In physical cash handed across the counter at the broker's office
• b.By posting a cheque to the counterparty around one month after the trade
• c.Solely in US dollars regardless of the currency of the trade
• d.Through designated settlement banks, with funds moving between participants' bank accounts✓

The cash leg of settlement runs through designated banks: participants maintain money-settlement accounts, and funds are debited or credited to match the stock movements on the settlement day, achieving delivery broadly against payment.

A key risk that IPO subscribers face, even for a company with sound fundamentals, is that:

• a.Their dividend is fixed at the same level for the life of the shares
• b.The shares may trade below the offer price once secondary-market dealing begins✓
• c.They are contractually prevented from ever selling the allotted shares
• d.They are guaranteed by law to lose money on the investment

There is no guarantee that a newly listed share will trade at or above its offer price; weak after-market demand or poor sentiment can push it below the IPO price. Subscribers bear market risk from the first day of dealing despite any stabilisation activity.

Under SEHK's HKD-RMB Dual Counter Model, an eligible listed stock can be:

• a.Bought but never sold in renminbi
• b.Traded in either a Hong Kong dollar counter or a renminbi counter, with the shares interchangeable between the two✓
• c.Traded only in US dollars
• d.Listed only on a Mainland exchange

The Dual Counter Model lets the same listed shares trade in parallel HKD and RMB counters. The counters are fungible (interchangeable), and a Dual Counter Market Maker helps keep the two prices aligned, broadening RMB investment channels for investors.

In a typical Hong Kong retail IPO, if the public (retail) tranche is oversubscribed by 100 times or more, the clawback mechanism increases the public tranche to about:

• a.100%
• b.5%
• c.10%
• d.50%✓

Clawback reallocates shares from the placing tranche to the retail tranche as retail demand rises: broadly 30% at 15x or more, 40% at 50x or more, and 50% at 100x or more oversubscription, so heavy retail interest is met with more shares.