HKEX Disclosure Requirements for Dividend Policy Compared to Market Practice

The Hong Kong Stock Exchange (HKEX) has, through its December 2024 consultation conclusions on the Listing Rules governing corporate governance and environmental, social, and governance (ESG) matters, codified a previously implicit expectation: listed issuers must now publish a formal dividend policy. This shift, effective for financial years commencing on or after 1 January 2025, moves the disclosure from a best-practice recommendation under the old Corporate Governance Code (CGC) to a mandatory requirement under Listing Rules Chapter 14A (for connected transactions) and Chapter 13 (for general disclosure obligations). The regulatory driver is clear: the SFC and HKEX are closing the gap between market practice and formal rule, targeting the 38% of Main Board issuers identified in HKEX’s 2023 review of annual reports as lacking a publicly stated dividend policy. For CFOs and company secretaries of issuers with BVI, Cayman, or Bermuda holding structures, this is not a cosmetic change. The new rule demands a board-approved, published document that outlines the factors considered—profitability, cash flow, capital requirements—and the expected frequency and form of distributions. Failure to comply exposes the board to potential enforcement action under the SFC’s Code of Conduct for Corporate Governance (paragraph 2.3) and the Listing Rules’ general disclosure provisions.

The Codification of Dividend Policy Disclosure

The most significant shift is the elevation of dividend policy disclosure from a non-binding code provision to a mandatory rule under the HKEX Listing Rules. Prior to the January 2025 changes, the requirement was housed in the Corporate Governance Code (CGC), specifically Code Provision E.1.5, which merely “recommended” that issuers have a policy. The new regime, formalised in the consultation conclusions published on 19 December 2024, moves this to a mandatory requirement under Listing Rules Chapter 13, Rule 13.21(1)(c). This rule now explicitly states that an issuer must “have a policy on the payment of dividends and must disclose that policy in its annual report.”

The 2024-2025 Transition Period

The transition is not immediate. The new rule applies to annual reports covering financial years commencing on or after 1 January 2025. This means that for an issuer with a 31 December financial year-end, the first mandatory disclosure will appear in the 2026 annual report. For a 31 March year-end issuer, the first report affected will be that for the year ending 31 March 2026. This 12-month lead period is deliberate, allowing boards time to formally adopt a policy and integrate it into their corporate governance framework. The HKEX has made it clear, however, that the policy must be in place from the start of the financial year; retroactive adoption is not permitted.

Market Practice vs. Regulatory Baseline

A 2023 HKEX review of Main Board issuers’ annual reports found that only 62% had a publicly stated dividend policy. Among those that did, the quality of disclosure varied significantly. The most common approach was a short paragraph in the Corporate Governance Report stating that dividends were “at the discretion of the board” and dependent on “profitability and cash flow.” This minimalist approach, while technically compliant with the old code, falls short of the new rule’s requirement for a “clear and detailed policy.” The HKEX’s 2024 consultation paper explicitly cited this gap, noting that investors—particularly institutional shareholders and family offices—demand greater predictability. The new rule therefore sets a baseline: the policy must cover the factors considered (profitability, cash flow, capital expenditure plans, debt covenants), the expected frequency (interim, final, special), and the form of distribution (cash, scrip, or a combination).

Key Elements of a Compliant Dividend Policy

The HKEX has not prescribed a one-size-fits-all template, but the Listing Rules and accompanying guidance in the Corporate Governance Code (now amended) provide a clear framework. An issuer’s dividend policy must be “board-approved” and “published” in the annual report. The policy must also be “reviewed annually” by the board, with any changes disclosed. This creates a formal governance process that cannot be delegated to management alone.

The “Factors to Consider” Clause

The most critical section of the policy is the list of factors the board will consider before declaring a dividend. The HKEX expects this to be specific, not generic. Acceptable factors include:

• Financial performance: Net profit attributable to equity holders, adjusted for non-recurring items.
• Cash flow: Free cash flow, operating cash flow, and debt service coverage ratios.
• Capital requirements: Planned capex, acquisitions, and working capital needs.
• Regulatory constraints: Solvency tests under the Companies Ordinance (Cap. 622), or equivalent tests under the issuer’s jurisdiction of incorporation (BVI Business Companies Act, Cayman Companies Law).
• Debt covenants: Restrictions in loan agreements or bond indentures that limit dividend payments.
• Retained earnings: The legal requirement that dividends be paid only from distributable profits.

A well-drafted policy will also include a “disclaimer” clause, stating that the policy does not create a legal obligation to pay dividends and that the board retains discretion. This is essential to avoid shareholder claims for constructive dividends.

Frequency and Form of Distributions

The policy must state the expected frequency of dividend payments. The most common approach is a semi-annual structure: an interim dividend (typically declared in August or September) and a final dividend (proposed in the annual results and approved at the AGM). Some issuers also declare special dividends, which should be addressed in the policy. The form of distribution—cash, scrip, or a combination—must also be specified. If the issuer has a scrip dividend programme, the policy should outline the mechanism for electing to receive shares instead of cash, including the pricing formula (e.g., a discount to the average closing price over a specified period).

Practical Implications for Issuers and Advisors

The new rule has direct consequences for the drafting of annual reports, the conduct of board meetings, and the management of investor expectations. For issuers with complex corporate structures—particularly those with a BVI or Cayman holding company and a PRC operating subsidiary—the dividend policy must address the flow of funds from the operating entity to the listed parent. This is especially relevant for VIE (Variable Interest Entity) structures, where dividend repatriation is subject to PRC foreign exchange controls and withholding tax.

Board Approval and Annual Review

The requirement for board approval is not a formality. The board must formally adopt the policy at a board meeting, and the minutes must record the discussion. The annual review must also be minuted, with any changes to the policy explained. This creates a clear audit trail for the SFC and HKEX. For issuers with a majority of independent non-executive directors (INEDs), the INEDs should be actively involved in the review, particularly if the policy involves a trade-off between dividend payments and reinvestment for growth.

Disclosure in the Annual Report

The dividend policy must be disclosed in the Corporate Governance Report section of the annual report. The HKEX has not specified a separate heading, but market practice is evolving towards a dedicated “Dividend Policy” subsection. The policy should be cross-referenced in the Directors’ Report and the Financial Statements. If the issuer has a dividend reinvestment plan (DRIP) or scrip dividend scheme, the terms must be disclosed in the same section.

Impact on Investor Relations

For family offices and institutional investors, a published dividend policy is a key factor in portfolio allocation. A policy that commits to a specific payout ratio (e.g., 30-50% of net profit) provides predictability. A policy that is vague or overly discretionary is viewed negatively. The HKEX’s 2023 market feedback indicated that 72% of institutional investors surveyed considered dividend policy disclosure “very important” or “critical” in their investment decisions. Issuers that fail to provide a clear policy may face a discount in valuation, particularly in sectors where dividends are a core part of the investment thesis (e.g., utilities, REITs, and mature industrials).

Comparison with International Standards

The HKEX’s new rule aligns Hong Kong with other major exchanges, but with notable differences. The Singapore Exchange (SGX) has required a dividend policy disclosure since 2018 under its Code of Corporate Governance, but the policy can be a simple statement that dividends are at the board’s discretion. The London Stock Exchange (LSE), under the UK Corporate Governance Code, requires a “clear explanation” of the dividend policy, but does not mandate a formal board-approved document. The HKEX’s approach is closer to that of the Australian Securities Exchange (ASX), which under its Corporate Governance Principles and Recommendations (4th edition, 2019) requires a “policy on dividends” that is “disclosed in the annual report.”

The “Solvency Test” Difference

A key distinction is the legal framework for dividend payment. In Hong Kong, the Companies Ordinance (Cap. 622) requires a solvency test: dividends can only be paid from distributable profits, and the company must remain solvent immediately after the payment. In the Cayman Islands and BVI, the test is similar but based on the company’s ability to pay its debts as they fall due. For issuers incorporated in these jurisdictions, the dividend policy must explicitly reference the applicable solvency test. The HKEX has confirmed that it will accept a policy based on the issuer’s home jurisdiction law, provided it is clearly stated.

The “Payout Ratio” Debate

Market practice on payout ratios varies by sector and size. The Hang Seng Index (HSI) constituents have an average payout ratio of approximately 45% (based on 2023 data from Bloomberg). However, the HKEX does not mandate a specific ratio. The policy can state a range (e.g., 30-50%) or a formula (e.g., a fixed percentage of net profit). The key is that the policy is “clear and detailed.” A policy that simply states “the board will consider dividends” is no longer sufficient. The policy must provide enough specificity for investors to form a view on future distributions.

Actionable Takeaways

1. Adopt a board-approved dividend policy before the start of the first affected financial year (1 January 2025 for 31 December year-end issuers), ensuring it covers the mandatory factors: profitability, cash flow, capital requirements, and regulatory constraints.
2. Include a specific payout ratio or a formula-based approach in the policy to meet investor expectations for predictability, rather than relying on a generic “board discretion” clause.
3. Update the Corporate Governance Report to include a dedicated “Dividend Policy” subsection, cross-referenced to the Directors’ Report and Financial Statements.
4. For issuers with BVI, Cayman, or Bermuda holding companies, ensure the policy explicitly references the solvency test under the applicable companies law, and addresses the flow of funds from operating subsidiaries.
5. Conduct an annual board review of the policy, minuting the discussion and any changes, to demonstrate compliance with the new mandatory Listing Rule 13.21(1)(c).