At the Board meeting today, we arrived at some important conclusions on a number of issues. First, I am pleased to report that we have identified three firms whom we would wish to appoint to a panel of financial advisers primarily to assist in the design and implementation of the disposal plan for the Hong Kong Equity Portfolio. We shall now approach these three firms to negotiate the detailed terms of the assignment and an announcement of the names of these institutions will be made after the contracts are signed hopefully before the end of April.
During the process of selecting the financial advisers, we have received a variety of ideas on the disposal methodology from a number of firms. Having considered all these ideas, EFIL Directors consider that it is necessary to pursue a combination of disposal methods including possibly share placements, unitisation, exchangeable bonds and corporate share buybacks. EFIL will need to adopt a flexible approach in terms of timing, methods and size of disposal, bearing in mind our primary objective of avoiding causing disruption to the stability of the market throughout the process.
I would like to emphasize again that the panel of advisers do not have any exclusive rights over future disposal transactions and that there would be opportunities for other firms not included in the panel to participate in these transactions in due course. I should add, in this connection, that there are certain specific ideas that we are going to pursue and develop further with the financial institutions which proposed such ideas but are not included in the panel.
Following the announcement by the Financial Secretary in his Budget Speech earlier this month of a 5% allocation to Hong Kong equities as a long-term investment for the Exchange Fund, EFIL has been requested to manage this Hong Kong equity portfolio through external managers. EFIL is very pleased to be given this assignment and has started the necessary preparation work for the appointment of external managers for this purpose.
Finally, I would like to say a few words on the question of proxy voting. Directors consider it very important for EFIL to strike the right balance between non-interference with the day-to-day commercial activities of the companies and the need to safeguard the Government's interest as a responsible minority shareholder. We have studied the best practices amongst major fund managers in the developed markets such as the US and Europe. Having taken into account the local market conditions here in Hong Kong, Directors have agreed the following proxy voting guidelines for EFIL :-
(a) EFIL would not advise seeking board representation or interfering with the day-to-day operations of the companies;
(b) EFIL would normally advise abstaining from voting at Annual General Meetings and Extraordinary General Meetings on mundane or routine matters that have no material impact on the value of the Government's shareholdings, such as the adoption of audited accounts and reports of directors and auditors and the declaration of dividends; and
(c) EFIL would consider and advise on voting on all other proposals such as mergers and acquisitions; takeovers; and connected party transactions on a "case-by-case" basis.
Naturally, these guidelines may need to be reviewed from time to time in light of actual experience and changing circumstances.
Exchange Fund Investment Limited
16 March 1999
