A Sponsor's Review of the Diversity and Inclusion Policies of the Listing Applicant

The Hong Kong Stock Exchange’s (HKEX) decision to codify board diversity requirements into Listing Rules effective 1 January 2025, moving beyond the “comply or explain” framework for the first time, has materially elevated the sponsor’s due diligence burden in pre-IPO engagements. Under the amended Main Board Rule 13.92 and GEM Rule 17.104, a listing applicant must now have at least one director of a different gender on its board, and the HKEX will not consider an applicant suitable for listing if its entire board comprises a single gender. This shift from a soft recommendation to a hard listing eligibility criterion means that a sponsor’s review of the applicant’s diversity and inclusion (D&I) policies is no longer a peripheral governance check but a core component of the sponsor’s reasonable grounds to believe opinion under the Sponsors’ Code of Conduct (Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, paragraph 5.1(a)). The SFC’s 2024 thematic inspection findings, published in its “Report on the Management of Sponsors’ Due Diligence Work” (March 2024), specifically flagged that 30% of sampled sponsor files contained inadequate documentation of the applicant’s compliance with diversity-related governance requirements. For the 2025-2026 IPO pipeline, particularly for applicants from jurisdictions where single-gender boards remain common (e.g., certain PRC state-owned enterprises or family-controlled enterprises in Southeast Asia), the sponsor must now formally assess not only the policy’s existence but its operational substance, historical adherence, and the applicant’s roadmap for meeting the new minimum threshold at the time of listing.

The Regulatory Architecture: From Soft Guidance to Hard Listing Criterion

The HKEX’s 2013 consultation paper on board diversity introduced the “comply or explain” framework under the Corporate Governance Code (CG Code) provisions A.5.5 and A.5.6. For a decade, this approach allowed listing applicants to disclose their diversity policy—or explain why none existed—without facing a direct listing disqualification. The 1 January 2025 amendments fundamentally alter this calculus.

The New Minimum Threshold Under Main Board Rule 13.92

Main Board Rule 13.92 now requires that an issuer’s board include at least one director of a different gender. The HKEX’s “Consultation Conclusions on Proposed Enhancements to the Corporate Governance Code and Related Listing Rules” (April 2024) confirmed that this is a listing eligibility requirement, not merely a continuing obligation. For a sponsor reviewing a pre-IPO applicant, this means the sponsor must verify that the applicant’s board composition as at the date of the listing application—and its expected composition at listing—satisfies this rule. The HKEX explicitly stated in the consultation conclusions that it “will not consider an applicant suitable for listing if its board comprises directors of a single gender” (paragraph 64). This creates a binary pass/fail gate that did not exist for any applicant before 2025.

The SFC’s 2024 Thematic Inspection Findings on Diversity Documentation

The SFC’s March 2024 report on sponsor due diligence management identified that 30% of sampled sponsor files lacked “adequate documentation to demonstrate the sponsor’s review of the applicant’s compliance with governance-related requirements, including board diversity policies” (paragraph 3.7 of the report). The SFC further noted that in 15% of these cases, the sponsor had relied solely on a representation letter from the applicant’s legal counsel without conducting independent verification of the diversity policy’s implementation. For a sponsor operating in the 2025-2026 cycle, this finding is a direct regulatory risk indicator: the SFC will expect the sponsor’s working papers to contain a structured review of the applicant’s D&I policy, including evidence of board-level discussion, minutes of nomination committee meetings addressing diversity, and a documented timeline for achieving the new minimum threshold if the applicant’s board is currently single-gender at the time of the sponsor’s engagement.

The Sponsor’s Structured Due Diligence Framework for D&I Policies

A sponsor’s review of an applicant’s D&I policy must be embedded within the broader due diligence programme required under paragraph 17 of the Sponsors’ Code of Conduct. The SFC’s “Guidelines on the Application of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission” (December 2023 update) emphasises that the sponsor must have “reasonable grounds to believe” that all information in the listing document is true and complete. D&I policy disclosures are now a material part of that information.

Phase One: Policy Existence and Scope

The sponsor’s first verification step is to confirm that the applicant has a formal, board-approved diversity policy in place. This is not a generic document: the HKEX’s CG Code provision B.1.3 (effective 1 January 2025) requires the policy to include measurable objectives for achieving gender diversity at both the board level and across the broader workforce, including senior management. The sponsor must obtain a certified copy of the policy, review the board resolution approving it, and confirm that the policy covers the following specific elements: (a) the target percentage of board seats to be held by directors of a different gender within a defined timeframe (the HKEX expects a target of no less than 20% by 2028, as stated in the consultation conclusions at paragraph 72); (b) the process for identifying and nominating candidates from underrepresented groups; and (c) the mechanism for annual review and reporting on progress against the measurable objectives.

Phase Two: Historical Implementation and Workforce Data

A policy on paper is insufficient. The sponsor must review the applicant’s actual board composition over the preceding three financial years (or since incorporation, if shorter) to assess the historical trajectory of diversity. For a PRC-based applicant incorporated in the Cayman Islands, the sponsor should also review the disclosure in the prospectus’s “Corporate Governance” section, which under HKEX Listing Rule 11.07 must include a statement of the diversity policy and the board’s progress against its measurable objectives. The sponsor should cross-reference this with the applicant’s annual reports (if listed elsewhere) or board minutes to verify consistency. The SFC’s thematic inspection report specifically criticised sponsors who accepted “management’s oral representation that diversity was considered” without documentary evidence (paragraph 4.2). The sponsor should therefore obtain copies of the nomination committee’s meeting minutes for at least the two most recent meetings to confirm that diversity was a formal agenda item.

Phase Three: The Roadmap to Compliance for Single-Gender Boards

If the applicant’s board is currently single-gender at the time of the sponsor’s engagement, the sponsor must construct a detailed roadmap to compliance with Main Board Rule 13.92. This roadmap must include: (i) the identity of the proposed director of a different gender; (ii) the expected date of appointment; (iii) evidence that the candidate has been identified and has consented to act; and (iv) confirmation that the appointment will be completed before the date of listing. The HKEX’s “Guidance Letter HKEX-GL117-24” (December 2024) on diversity disclosures states that the Exchange will require the sponsor to confirm in the sponsor’s declaration that the applicant will have at least one director of a different gender on its board on the first day of trading. If the appointment is conditional on regulatory approvals (e.g., from the PRC’s China Securities Regulatory Commission for a H-share issuer), the sponsor must assess the probability and timing of such approval and disclose the risk in the prospectus’s risk factors section.

Cross-Jurisdictional Considerations for PRC and Cayman-Listed Applicants

The sponsor’s D&I due diligence becomes materially more complex when the listing applicant is a PRC-incorporated company seeking to list on the Main Board via an H-share structure, or a Cayman-incorporated company with a PRC-based operating business through a variable interest entity (VIE) structure.

PRC Domestic Legal Framework and Its Interaction with HKEX Rules

PRC company law does not currently mandate board gender diversity. The Companies Law of the People’s Republic of China (revised 2023, effective 1 July 2024) contains no provision requiring a minimum number of directors of a different gender. For a PRC-incorporated H-share issuer, the board is typically composed of executive directors who are senior management of the state-owned enterprise or private group, and the nomination process is often governed by the controlling shareholder’s internal rules. The sponsor must reconcile this domestic legal environment with the HKEX’s new hard requirement. The practical solution is for the applicant to appoint an independent non-executive director (INED) of a different gender before listing. The sponsor should verify that the appointment process complies with PRC law, including the requirement under the PRC Company Law that INEDs be elected by the shareholders’ general meeting. The sponsor should also confirm that the candidate does not fall within any disqualification under PRC securities regulations, such as the “Guiding Opinions on the Establishment of Independent Director System in Listed Companies” (CSRC, 2023 update).

Cayman-Listed VIE Structures: The Nomination Committee and BVI Holdco Layers

For a Cayman-incorporated applicant with a BVI intermediate holding company and a PRC operating entity via a VIE, the board diversity policy must be implemented at the Cayman-listed issuer level. The sponsor must trace the nomination process through the corporate structure: the Cayman issuer’s board appoints a nomination committee (typically composed of INEDs under CG Code provision B.1.1), which recommends candidates to the full board. The sponsor should review the memorandum and articles of association of the Cayman issuer to confirm that there is no provision that restricts the board’s ability to appoint directors of a different gender. For the BVI-incorporated intermediate holding company, the sponsor should confirm that its board composition does not create a de facto single-gender board at the consolidated group level, as the HKEX’s diversity rules apply to the listed issuer’s board, not each subsidiary’s board. However, the sponsor should disclose in the prospectus the board composition of the key operating subsidiaries if the listing applicant’s board is the only board with gender diversity, as this could be material to investors assessing the group’s overall commitment to D&I.

Documentation Standards and Sponsor’s Declaration

The sponsor’s working papers on D&I policy review must meet the SFC’s documentation standards under paragraph 5.2 of the Sponsors’ Code of Conduct, which requires the sponsor to maintain “proper and complete records” of all due diligence steps taken.

The Sponsor’s Declaration and the HKEX’s Vetting Approach

The sponsor’s declaration under Listing Rule 3A.02 must now include a specific representation that the applicant’s board complies with Main Board Rule 13.92 (or will comply by the date of listing). The HKEX’s Listing Division has indicated in its internal training materials (2025) that it will query any declaration where the applicant’s board is single-gender at the time of the A1 filing, even if the sponsor provides a roadmap for compliance. The Exchange will expect the sponsor to have identified the proposed director and to have obtained a signed consent to act before the A1 submission. If the appointment is pending regulatory approval, the HKEX may require the sponsor to provide a legal opinion from PRC counsel on the probability and timeline for such approval.

The SFC’s Expected Minimum Documentation List

Based on the SFC’s 2024 thematic inspection report and subsequent guidance, the sponsor’s working papers should contain at minimum the following documents related to D&I review: (a) a certified copy of the applicant’s board-approved diversity policy; (b) the board resolution approving the policy; (c) minutes of the nomination committee meetings for the two most recent financial years; (d) a schedule of the board’s composition for the preceding three financial years, broken down by gender; (e) a written confirmation from the applicant’s legal counsel (PRC or Cayman, as applicable) that the appointment of the proposed director of a different gender complies with all applicable laws; (f) the signed consent to act from the proposed director; and (g) a timeline for the appointment, including any regulatory approvals required. The sponsor should also maintain a record of its own analysis, including any red flags identified and the sponsor’s resolution of those issues.

Actionable Takeaways for Sponsor Compliance Teams

1. Embed the D&I policy review into the sponsor’s initial due diligence checklist at the mandate letter stage, not as a last-minute governance check before the A1 filing, to avoid the 30% documentation gap identified by the SFC in its 2024 thematic inspection report.

2. Obtain a signed consent to act from the proposed director of a different gender before submitting the A1 filing, as the HKEX Listing Division will now query any applicant with a single-gender board at the time of filing, even with a roadmap for compliance.

3. For PRC-incorporated H-share applicants, commission a PRC legal opinion on the appointment process for the INED of a different gender, confirming compliance with the PRC Company Law (2024 revision) and CSRC’s independent director rules, and include this opinion in the sponsor’s working papers.

4. For Cayman-incorporated VIE structures, verify that the memorandum and articles of association of the Cayman issuer do not contain any restriction on appointing directors of a different gender, and confirm that the BVI intermediate holding company’s board composition does not undermine the listed issuer’s diversity representation.

5. Document the sponsor’s independent verification of the applicant’s historical board composition over the preceding three financial years, cross-referencing board minutes, annual reports (if applicable), and nomination committee records, to demonstrate compliance with paragraph 5.1(a) of the Sponsors’ Code of Conduct.