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CS Professional SMCF practice questions

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Question 1Securities Markets and Instruments

In Hong Kong, which regulatory body is responsible for authorizing the offering documents of collective investment schemes offered to the public?

  1. The Hong Kong Monetary Authority
  2. The Securities and Futures Commission Correct answer.
  3. The Insurance Authority
  4. The Stock Exchange of Hong Kong Limited

Explanation

Under the Securities and Futures Ordinance, the Securities and Futures Commission authorizes the issue of offering documents for collective investment schemes marketed to the Hong Kong public. The HKMA supervises banks, the Exchange operates the listing market, and the Insurance Authority regulates insurers.

Question 2Securities Markets and Instruments

A company listed on the Main Board of the Stock Exchange of Hong Kong announces a rights issue. What does this mean for existing shareholders?

  1. They receive a fixed cash dividend in place of a dividend payment
  2. They are given the right to convert their shares into bonds issued by the company
  3. They must sell their shares back to the company at the offer price
  4. They are offered new shares in proportion to their existing holdings, usually at a discount Correct answer.

Explanation

A rights issue gives existing shareholders a pre-emptive entitlement to subscribe for new shares in proportion to their current holding, typically at a price below the market price. The right is an option, not an obligation, so shareholders may take up, sell, or let the entitlement lapse.

Question 3Securities Markets and Instruments

Which characteristic best distinguishes a bond from an ordinary share?

  1. The bondholder has voting rights at the issuer's general meetings
  2. The bondholder receives a share of residual profits after all creditors are paid
  3. The bondholder's return is always linked to the issuer's dividend policy
  4. The bondholder is a creditor with a contractual claim to interest and principal Correct answer.

Explanation

A bond represents a debt obligation: the holder is a creditor entitled to scheduled interest and repayment of principal, ranking ahead of shareholders in the event of insolvency. Ordinary shareholders hold residual equity claims and typically carry voting rights.

Question 4Securities Markets and Instruments

Which of the following best describes the role of a market maker in the Hong Kong securities market?

  1. To continuously quote bid and offer prices and thereby provide liquidity Correct answer.
  2. To guarantee investors against losses on their trades
  3. To act as the central counterparty for all settled trades
  4. To set the official closing price of every listed security each day

Explanation

A market maker stands ready to buy and sell a security by continuously quoting bid and offer prices, which supports liquidity and narrows spreads. Guarantees against loss are not provided, closing prices are determined by the trading mechanism, and central counterparty functions sit with the clearing house.

Question 5Securities Markets and Instruments

An investor buys shares on a Hong Kong exchange and the trade settles two business days later. Which term describes this arrangement?

  1. T+2 settlement Correct answer.
  2. Rolling settlement
  3. Forward settlement
  4. T+0 settlement

Explanation

Settlement cycles are expressed as T plus the number of business days after the trade date. A trade settling two business days after execution is on a T+2 cycle, which is the standard for Hong Kong equities.

Question 6Securities Markets and Instruments

Which of the following securities is a derivative?

  1. A cumulative preference share
  2. A retail bond with a fixed coupon
  3. A stock index futures contract Correct answer.
  4. A ten-year government bond

Explanation

A derivative derives its value from an underlying asset or index; stock index futures are a classic example, with value linked to the index level. Bonds and preference shares are cash instruments whose value comes from their own contractual cash flows.

Question 7Securities Markets and Instruments

What is the primary purpose of a collective investment scheme such as a unit trust?

  1. To pool investors' money and invest it according to a defined investment policy Correct answer.
  2. To underwrite new share issues on behalf of issuers
  3. To lend money to investors against their shareholdings
  4. To provide deposit insurance for retail savers

Explanation

A collective investment scheme pools subscriptions from many investors and manages them collectively under a stated investment objective and policy. This gives investors diversified exposure and professional management rather than lending, deposit protection, or underwriting services.

Question 8Securities Markets and Instruments

Which of the following is a money market instrument?

  1. A convertible bond with a five-year term
  2. A 90-day negotiable certificate of deposit Correct answer.
  3. An exchange-traded fund tracking an equity index
  4. A 30-year corporate bond

Explanation

Money market instruments are short-term, highly liquid debt instruments, typically with maturities of one year or less; a 90-day negotiable certificate of deposit fits this description. Long-dated bonds, convertibles and equity funds are capital market or equity products.

Question 9Securities Markets and Instruments

An investor holding 1,000 shares of a company that announces a one-for-ten rights issue at HK$8 per share, when the market price is HK$10. What is the value of the theoretical entitlement to subscribe for the new shares?

  1. HK$8,000 Correct answer.
  2. HK$10,000
  3. HK$1,000
  4. HK$2,000

Explanation

A one-for-ten rights issue entitles the holder of 1,000 shares to subscribe for 100 new shares. At HK$8 each, the total subscription cost is HK$800 per 100 shares times 10, which equals HK$8,000 for 1,000 shares' entitlement (100 new shares at HK$8). The subscription outlay is the direct measure of the entitlement's cost.

Question 10Securities Markets and Instruments

A bond with a face value of HK$100,000 pays a 4% annual coupon and matures in three years. If the required yield is 4%, what is the bond's price?

  1. HK$104,000
  2. HK$100,000 Correct answer.
  3. HK$92,000
  4. HK$96,000

Explanation

When the coupon rate equals the required yield, the present value of the coupon and principal cash flows equals the face value. Here both rates are 4%, so the bond trades at par, HK$100,000.

Question 11Securities Markets and Instruments

An investor buys a stock at HK$50 and sells it one year later at HK$56, having received a dividend of HK$2 during the year. What is the total holding period return?

  1. 20%
  2. 4%
  3. 12%
  4. 16% Correct answer.

Explanation

Total return combines capital gain and income: (HK$56 - HK$50 + HK$2) / HK$50 = HK$8 / HK$50 = 16%. The capital gain alone is 12%, and the dividend adds a further 4 percentage points.

Question 12Securities Markets and Instruments

A convertible bond has a conversion price of HK$25 and the underlying share trades at HK$30. What is the conversion value per HK$1,000 face value bond?

  1. HK$833
  2. HK$1,000
  3. HK$1,250
  4. HK$1,200 Correct answer.

Explanation

The conversion ratio is face value divided by conversion price: HK$1,000 / HK$25 = 40 shares. Multiplying by the share price of HK$30 gives a conversion value of HK$1,200.

Question 13Securities Markets and Instruments

Which risk is most directly reduced for an investor by holding a diversified portfolio of equities?

  1. Inflation risk affecting all cash flows
  2. Systematic market risk affecting all equities
  3. Interest rate risk affecting the whole economy
  4. Unsystematic risk specific to individual companies Correct answer.

Explanation

Diversification offsets company-specific, unsystematic risk because idiosyncratic movements tend to cancel out across many holdings. Market-wide systematic risk, inflation risk and economy-wide interest rate risk remain because they affect all securities simultaneously.

Question 14Securities Markets and Instruments

A preference share is described as cumulative. What does this mean for the holder?

  1. The holder ranks ahead of all secured creditors on liquidation
  2. The dividend rate increases each year automatically
  3. The shares convert into ordinary shares after a fixed period
  4. Unpaid dividends accumulate and must be paid before ordinary dividends are resumed Correct answer.

Explanation

Cumulative preference shares carry the right to receive any dividends that were omitted in prior periods before ordinary shareholders can be paid. The feature protects the preference dividend stream but does not create automatic increases, conversion, or priority over secured creditors.

Question 15Securities Markets and Instruments

What is the key difference between a closed-end fund and an open-end fund?

  1. A closed-end fund guarantees capital, while an open-end fund does not
  2. A closed-end fund is always listed, while an open-end fund is never regulated
  3. A closed-end fund issues a fixed number of shares that trade on an exchange, while an open-end fund issues and redeems units at net asset value Correct answer.
  4. A closed-end fund invests only in bonds, while an open-end fund invests only in equities

Explanation

Closed-end funds raise a fixed pool of capital and their shares then trade on an exchange, often at a premium or discount to net asset value. Open-end funds continuously issue and redeem units at net asset value on request, which is the structural distinction.

Question 16Securities Markets and Instruments

An investor expects interest rates to fall and wants to maximize capital appreciation from a bond holding. Which bond characteristic would generally produce the greatest price sensitivity to a rate decline?

  1. A long maturity with a low coupon Correct answer.
  2. A short maturity with a high coupon
  3. A long maturity with a high coupon
  4. A short maturity with a low coupon

Explanation

Price sensitivity to yield changes, measured by duration, rises with longer maturity and lower coupon because more of the bond's value is received far in the future. A long-maturity, low-coupon bond therefore gains most when yields fall.

Question 17Securities Markets and Instruments

Which statement correctly describes the exercise of a European-style equity option?

  1. It may be exercised only through the clearing house on the trade date
  2. It may be exercised at any time before expiration
  3. It may be exercised only if the option is in the money at expiry
  4. It may be exercised only on the expiration date Correct answer.

Explanation

European-style options can be exercised only on the expiry date, unlike American-style options which can be exercised at any time up to expiry. Whether the option is in the money determines whether exercise is worthwhile, not the timing rule.

Question 18Securities Markets and Instruments

What is the main economic function of a stock exchange's listing rules?

  1. To insure listed companies against takeover
  2. To fix the market price of each listed security
  3. To set minimum standards of disclosure and eligibility for companies seeking a public listing Correct answer.
  4. To guarantee investors a minimum return on listed shares

Explanation

Listing rules establish eligibility criteria and ongoing disclosure obligations so investors can make informed decisions about listed securities. They do not set prices, guarantee returns, or protect companies from takeover.

Question 19Securities Markets and Instruments

An investor buys a futures contract at a price of 20,000 with a contract multiplier of HK$50 and an initial margin of HK$100,000. If the index falls to 19,600, what is the effect on the margin account?

  1. A gain of HK$20,000 is credited to the account
  2. No change occurs until the contract expires
  3. A loss of HK$20,000 is debited to the account Correct answer.
  4. A loss of HK$400 is debited to the account

Explanation

Futures are marked to market daily. The price fell by 400 points, and 400 x HK$50 = HK$20,000, which is debited as a loss against the HK$100,000 margin, leaving HK$80,000.

Question 20Securities Markets and Instruments

Which best explains why a bond's yield to maturity differs from its current yield?

  1. Yield to maturity is only available for floating rate notes
  2. Yield to maturity accounts for the time value of all remaining coupons and any gain or loss to par, while current yield considers only the annual coupon divided by price Correct answer.
  3. Yield to maturity ignores the coupon rate entirely
  4. Current yield includes capital gains on maturity

Explanation

Current yield is a simple ratio of annual coupon to market price. Yield to maturity is the internal rate of return that equates all remaining coupon and principal cash flows to the price, so it captures reinvestment timing and any pull to par.

Question 21Securities Markets and Instruments

An issuer wants to raise long-term capital without diluting existing shareholders and without creating a fixed interest obligation. Which instrument best meets these objectives?

  1. A fixed-rate debenture
  2. A convertible bond with a low coupon Correct answer.
  3. An ordinary share placing
  4. A cumulative preference share

Explanation

A convertible bond pays a lower coupon than straight debt and, until conversion, does not dilute shareholders; it also avoids the fixed high coupon of a debenture. Ordinary shares dilute immediately, and a fixed-rate debenture creates a contractual interest obligation.

Question 22Securities Markets and Instruments

A fund's net asset value per unit is HK$12.50 and its units trade on the exchange at HK$11.00. Which statement is correct?

  1. The fund is trading at a premium of 12% to net asset value
  2. The fund is trading at a discount of 13.6% to net asset value
  3. The fund is trading at a discount of 12% to net asset value Correct answer.
  4. The fund's net asset value exceeds its market price by HK$1.50, which is irrelevant to premium or discount

Explanation

The discount is (NAV - price) / NAV = (12.50 - 11.00) / 12.50 = 12%. Expressing the difference as a percentage of market price (13.6%) is the wrong base for a discount calculation.

Question 23Securities Markets and Instruments

An investor holds a two-year bond paying a 5% annual coupon with a face value of HK$100,000, purchased at par. Immediately after purchase, the required yield rises to 6%. Which statement best describes the outcome if the bond is held to maturity and coupons are reinvested at 6%?

  1. The investor earns slightly more than 5% because higher reinvestment income partly offsets the price fall Correct answer.
  2. The investor earns exactly 5% because the coupon rate is fixed
  3. The investor earns exactly 6% because the yield rose to 6%
  4. The investor earns less than 5% because the price falls and no reinvestment occurs

Explanation

Rising yields hurt the bond's price but raise the rate at which coupons are reinvested. For a holding period near the bond's duration these effects largely offset, and with a two-year horizon the higher reinvestment income can outweigh the price decline, producing a return modestly above the original 5% coupon.

Question 24Securities Markets and Instruments

Which scenario best illustrates basis risk in a hedging programme?

  1. A hedger closes a position before the contract's expiry date
  2. A hedger buys a futures contract and the exchange raises margin requirements
  3. A hedger uses a futures contract on a broad index to hedge a portfolio whose composition differs from the index Correct answer.
  4. A hedger holds a futures contract through delivery

Explanation

Basis risk arises when the hedging instrument and the exposure being hedged do not move perfectly together, so the difference between spot and futures prices can change unexpectedly. Using an index future against a differently composed portfolio creates exactly this mismatch.

Question 25Securities Markets and Instruments

A company issues a deeply discounted bond with no periodic coupon. Which term best describes this instrument?

  1. A floating rate note
  2. A convertible bond
  3. An income bond
  4. A zero-coupon bond Correct answer.

Explanation

A zero-coupon bond pays no periodic interest and is issued at a discount to face value, with the return accruing as the price pulls toward par at maturity. Floating rate notes reset coupons, convertibles carry conversion rights, and income bonds pay interest only when earned.

Question 26Securities Markets and Instruments

In Hong Kong, an investor buys shares on the Stock Connect Southbound channel. Which statement best describes the settlement arrangement for these trades?

  1. Trades settle only after physical share certificates are delivered to the investor.
  2. Trades settle on a T+0 basis because Stock Connect uses real-time gross settlement.
  3. Trades settle in the currency of the eligible Mainland market on the relevant Mainland settlement cycle. Correct answer.
  4. Trades settle in Hong Kong dollars on a T+2 basis through the Central Clearing and Settlement System.

Explanation

Southbound Stock Connect trading lets Hong Kong and overseas investors trade eligible Shanghai and Shenzhen shares, and settlement follows the Mainland market's cycle in RMB rather than the Hong Kong CCASS T+2 cycle. The clearing infrastructure links HKEX's systems with the Mainland depository, so the correct answer must reflect the Mainland currency and settlement convention.

Question 27Securities Markets and Instruments

A company's shares trade at HK$40. It announces a bonus issue of one new share for every four held. Ignoring tax and dealing costs, what is the theoretical ex-bonus price per share?

  1. HK$30.00
  2. HK$40.00
  3. HK$36.00
  4. HK$32.00 Correct answer.

Explanation

A bonus issue gives existing holders extra shares for no payment, so total market value is unchanged while the share count rises by 25%. With four old shares worth HK$160 combined becoming five shares, the theoretical ex-bonus price is HK$160 divided by five, or HK$32.00.

Question 28Securities Markets and Instruments

Which feature most clearly distinguishes a debt security from an equity security?

  1. The holder has voting rights at general meetings of the issuer.
  2. The holder bears the primary business risk of the issuer's operations.
  3. The holder participates in the residual profits of the issuer after all expenses are paid.
  4. The holder receives a fixed contractual return and ranks ahead of shareholders on liquidation. Correct answer.

Explanation

Debt securities create a creditor relationship: the issuer owes specified coupon and principal payments, and bondholders rank ahead of shareholders if the issuer is wound up. Equity represents ownership, carrying residual claims and voting rights rather than a contractual fixed return.

Question 29Securities Markets and Instruments

An investor wants exposure to a broad basket of Hong Kong equities but holds only HK$10,000 and wants to trade the position on-exchange during the day. Which instrument most directly meets this need?

  1. A Hong Kong-listed exchange-traded fund tracking a broad market index Correct answer.
  2. A Hong Kong government retail bond held to maturity
  3. A structured deposit with a capital protection feature
  4. A single blue-chip share purchased with the full amount

Explanation

An exchange-traded fund listed on the exchange gives diversified basket exposure in a single tradeable unit that can be bought and sold intraday, matching both the small capital base and the on-exchange requirement. The other choices offer either concentrated exposure or non-tradeable, hold-to-maturity products.

Question 30Securities Markets and Instruments

Which statement best describes the role of a market maker on an exchange's securities market?

  1. The market maker continuously quotes bid and offer prices to provide liquidity in assigned securities. Correct answer.
  2. The market maker approves new listings before they begin trading.
  3. The market maker sets the official closing price for every listed security each day.
  4. The market maker guarantees investors against losses on the securities it quotes.

Explanation

A market maker is obliged to post two-way prices within specified spreads and sizes for the securities it is assigned, which supports liquidity and narrower spreads. It does not underwrite investor losses, determine official closing prices, or act as a listing regulator.

Question 31Primary Market and Capital Raising

In a Hong Kong IPO, which document is issued by the issuer and contains the detailed disclosures, financial information and risk factors on which investors base their subscription decision?

  1. The formal notice
  2. The placing letter
  3. The allotment letter
  4. The prospectus Correct answer.

Explanation

The prospectus is the core disclosure document for a Hong Kong IPO, setting out the issuer's business, financials, risk factors and offer terms, and it must comply with the Companies (WUMP) Ordinance and SFC prospectus regime. Investors apply on the strength of it, and directors accept responsibility for its accuracy.

Question 32Primary Market and Capital Raising

Under the HKEX Listing Rules, what is the minimum track record period an applicant must generally satisfy for a Main Board listing based on profits?

  1. Two financial years
  2. Five financial years
  3. Three financial years Correct answer.
  4. One financial year

Explanation

Main Board applicants using the profit test must show a trading record of not less than three financial years, with the profit thresholds met across that period. This track record requirement lets the Exchange assess the durability of the business before admitting it.

Question 33Primary Market and Capital Raising

A company wishes to list on GEM rather than the Main Board. Which statement best describes the stream, as distinct from the Main Board?

  1. GEM listings are restricted to state-owned enterprises
  2. GEM is positioned for smaller growth companies with lower financial thresholds Correct answer.
  3. GEM applicants are exempt from producing a prospectus
  4. GEM has no sponsor requirement at all

Explanation

GEM is the growth-company stream of HKEX with lower eligibility thresholds than the Main Board, aimed at smaller and emerging issuers. GEM applicants remain subject to sponsor, prospectus and disclosure requirements; only the financial thresholds and certain rules are calibrated differently.

Question 34Primary Market and Capital Raising

In bookbuilding for an IPO, what does the term 'price discovery' refer to?

  1. The calculation of the stamp duty payable on allotment
  2. The process of gauging investor demand through indications of interest to help set the offer price Correct answer.
  3. The fixing of the final offer price solely by the issuer's board
  4. The determination of the listing fee owed to the Exchange

Explanation

Price discovery is the bookbuilding process in which the syndicate collects indications of interest and builds a demand curve, helping the issuer and underwriters settle on an offer price that reflects investor appetite. It is a market-sounding exercise, not a unilateral board decision.

Question 35Primary Market and Capital Raising

Which party typically acts as the principal channel between an IPO issuer and the Exchange, coordinating the listing application and due diligence?

  1. The sponsor Correct answer.
  2. The share registrar
  3. The compliance adviser
  4. The receiving bank

Explanation

The sponsor is appointed by the issuer to manage the listing application, lead due diligence and act as the primary point of contact with HKEX. Sponsors carry specific regulatory duties under the SFC's sponsor regime and the Listing Rules.

Question 36Primary Market and Capital Raising

What is the primary purpose of a cornerstone investment in a Hong Kong IPO?

  1. To allow the issuer to bypass the prospectus requirement
  2. To give cornerstone investors a guaranteed board seat
  3. To guarantee the issuer a minimum price after listing
  4. To provide certainty of demand by committing named investors to subscribe at the offer price before listing Correct answer.

Explanation

Cornerstone investors commit, usually through a placing, to subscribe for a specified amount at the final offer price, providing certainty of demand and a signal to other investors. They do not receive price guarantees or board seats in exchange.

Question 37Primary Market and Capital Raising

A Hong Kong issuer wants to raise additional equity after listing by issuing new shares to a small number of selected investors. Which general mandate mechanism typically authorises this without a fresh shareholder circular?

  1. A scrip dividend
  2. A bonus issue
  3. A general mandate placing Correct answer.
  4. A rights issue

Explanation

A general mandate, typically renewed annually by shareholders, allows the board to issue up to a specified percentage of existing shares, commonly used for placings to selected investors. This avoids the need to convene a general meeting for each issue within the mandate.

Question 38Primary Market and Capital Raising

Which of the following best describes a 'placing' as a method of distributing shares in a Hong Kong capital raising?

  1. An offer to the public at large through a prospectus
  2. A pro rata offer to existing shareholders
  3. An allocation of shares to selected investors arranged by a placing agent Correct answer.
  4. An auction open to all retail investors on the Exchange

Explanation

A placing involves allocating shares to a targeted group of investors, often institutions, through a placing agent under the terms of the relevant mandate or offer. It contrasts with a public offer, which is open to the public at large.

Question 39Primary Market and Capital Raising

An issuer is conducting a rights issue and wishes to allow shareholders to trade their entitlement to subscribe before the offer closes. What is the usual mechanism for this?

  1. Cumulative preference shares
  2. Nil-paid rights Correct answer.
  3. Convertible bonds
  4. Warrants issued to the placing agent

Explanation

Nil-paid rights are the temporary entitlements that can be renounced and traded on the Exchange during the rights issue period, letting holders sell their subscription rights. They become fully paid ordinary shares once the subscription is settled.

Question 40Primary Market and Capital Raising

A Main Board applicant's controlling shareholder operates a business that competes with the applicant. Under the Listing Rules, how is this generally addressed?

  1. It is permitted only if the competing business is transferred to the sponsor
  2. It must be disclosed and the Exchange may require safeguards, and the independence of the business must be demonstrated Correct answer.
  3. It is permitted without restriction because the shareholder is separate
  4. It is prohibited outright and the listing cannot proceed

Explanation

Competition between the applicant and a controlling shareholder is not automatically fatal, but it must be disclosed, and the Exchange will consider whether the applicant can operate independently and whether safeguards are needed. The focus is on protecting the listed issuer's interests and ensuring fair competition.

Question 41Primary Market and Capital Raising

In a Hong Kong IPO, the 'clawback' mechanism primarily serves which purpose?

  1. To claw back fees paid to the sponsor
  2. To reduce the offer price if demand is weak
  3. To allow the issuer to withdraw the offer after listing
  4. To reallocate shares from the placing tranche to the public offer tranche when retail demand is high Correct answer.

Explanation

Clawback reallocates shares from the placing tranche to the public offer tranche when the retail subscription is oversubscribed by specified multiples, increasing retail participation. It is a demand-responsive allocation mechanic, not a pricing or fee adjustment.

Question 42Primary Market and Capital Raising

A company listed on the Main Board wants to issue new shares under a general mandate. Which limit typically applies to the number of shares that may be issued under that mandate?

  1. Up to 20% of the issued share capital as at the date of the resolution Correct answer.
  2. Up to 50% of the issued share capital as at the date of the resolution
  3. Up to 10% of the issued share capital as at the date of the resolution
  4. There is no limit

Explanation

The general mandate is normally capped at 20% of the issued share capital as at the date of the relevant shareholder resolution, though a refresh or additional mandate may be sought. This cap protects shareholders against excessive dilution without their approval.

Question 43Primary Market and Capital Raising

During an IPO, an investor submits an application through a white form. How is the application money typically handled?

  1. It is paid directly to the issuer's bank account immediately
  2. It is held by the receiving bank and refunded if the application is unsuccessful or scaled back Correct answer.
  3. It is paid to the sponsor as a fee
  4. It is converted into a deposit for future IPOs

Explanation

Application monies are collected by the receiving banks and held pending allotment; unsuccessful or scaled-back applications are refunded. This protects applicants' funds until the allocation is finalised.

Question 44Primary Market and Capital Raising

Which statement best describes the role of a stabilising manager in a Hong Kong IPO?

  1. To set the final offer price after listing
  2. To support the aftermarket price by buying shares during a defined stabilisation period Correct answer.
  3. To guarantee the issuer a minimum subscription level
  4. To underwrite all unsold shares permanently

Explanation

The stabilising manager may conduct stabilising actions, such as buying shares in the aftermarket during the permitted period, to counter downward price pressure immediately after listing. This is a regulated activity subject to specific rules and disclosure.

Question 45Primary Market and Capital Raising

An issuer plans a rights issue but some shareholders are located in a jurisdiction where offering rights would breach local securities law. What is the usual approach?

  1. Proceed with the offer to them regardless of local law
  2. Exclude those shareholders entirely and give their entitlements to the underwriter or other shareholders Correct answer.
  3. Convert the rights issue into a bonus issue
  4. Cancel the rights issue

Explanation

Where local securities laws make an offer to overseas shareholders impractical or unlawful, the issuer typically excludes them and arranges for their entitlements to be sold or allocated, with the proceeds passed on where possible. This is disclosed in the rights issue documents.

Question 46Primary Market and Capital Raising

In the context of a Hong Kong IPO, what is the 'public offer tranche'?

  1. The portion sold to the issuer's employees only
  2. The portion of shares offered to retail investors who apply through the prescribed application channels Correct answer.
  3. The portion reserved for cornerstone investors
  4. The portion retained by the controlling shareholder

Explanation

The public offer tranche is the part of the IPO offered to retail and other public applicants, typically subject to clawback if oversubscribed. It is distinct from the placing tranche, which is allocated to selected investors.

Question 47Primary Market and Capital Raising

A company is considering a listing by way of introduction rather than a new share offer. What distinguishes this route?

  1. It requires no disclosure document of any kind
  2. It raises substantial new capital for the issuer
  3. It is available only to GEM applicants
  4. It admits existing shares to listing without a simultaneous capital raise Correct answer.

Explanation

A listing by introduction brings already-issued shares to the Exchange without issuing new shares or raising fresh capital at listing. The issuer still must satisfy listing eligibility and disclosure requirements.

Question 48Primary Market and Capital Raising

An issuer wishes to place new shares to investors but the placing would exceed its general mandate. What is the usual route to proceed?

  1. Convert the placing into a bonus issue
  2. Seek specific shareholder approval for the excess issue Correct answer.
  3. Rely on the sponsor's discretion to approve the excess
  4. Proceed anyway because placings are exempt from shareholder approval

Explanation

Issuing beyond the general mandate requires specific shareholder approval, typically through a general meeting and circular, because it exceeds the dilution authority previously granted. The mandate is a limit, not a discretionary allowance.

Question 49Primary Market and Capital Raising

Which of the following is a key continuing obligation that begins once a company's shares are admitted to listing on the Main Board?

  1. Filing a new prospectus for every subsequent share issue
  2. Obtaining Exchange approval for every commercial contract
  3. Appointing a new sponsor annually
  4. Publishing periodic financial reports and disclosing inside information in a timely manner Correct answer.

Explanation

After listing, the issuer must comply with continuing obligations such as periodic reporting and timely disclosure of inside information under the SFC's inside information regime and the Listing Rules. These obligations protect the market's access to accurate and timely information.

Question 50Primary Market and Capital Raising

A pre-IPO investor holds shares subject to a lock-up. What is the typical effect of the lock-up?

  1. The investor is restricted from disposing of the shares for a defined period after listing Correct answer.
  2. The investor's shares are cancelled at listing
  3. The investor must subscribe for additional shares at listing
  4. The investor may sell freely at listing

Explanation

A lock-up restricts a pre-IPO investor, often a cornerstone or controlling shareholder, from selling shares for a specified period after listing to support market stability. The restriction is contractual or rule-based and disclosed in the listing documents.