2023.07.10 TAO, Xudong、SHI, Yun、Lingyi GONG、Danchen LUO
I. Background
In October 2018, the China Securities Regulatory Commission ("CSRC") promulgated the Regulatory Provisions on Depository Receipts under the Stock Connect Scheme between the Shanghai Stock Exchange and the London Stock Exchange (for Trial Implementation), which marked the official launch of the Shanghai-London Stock Connect scheme in China. To expand the framework of the Shanghai-London Stock Connect scheme to the China-Europe Stock Connect scheme, in December 2021, the CSRC released the revised Regulatory Provisions on Depository Receipts under the Stock Connect Scheme between Domestic and Overseas Stock Exchanges. In March 2022, the Shanghai Stock Exchange and the Shenzhen Stock Exchange respectively promulgated the Interim Measures for the Listing and Trading of Depository Receipts under the Stock Connect Scheme between the Shanghai Stock Exchange and Overseas Stock Exchanges and the Interim Measures for the Listing and Trading of Depository Receipts under the Stock Connect Scheme between the Shenzhen Stock Exchange and Overseas Stock Exchanges, as the relevant ancillary rules of the aforementioned regulatory provisions.
In February 2023, the CSRC promulgated the Administrative Measures for the Offering and Listing of Securities Overseas by Domestic Enterprises (for Trial Implementation) and their ancillary guidelines to implement a uniform filing regime for domestic enterprises’ overseas listings. To further specify the filing requirements of domestically listed companies’ offering of global depository receipts ("GDR"), on May 16, 2023, the CSRC promulgated the Guideline No.6 for the Application of Regulatory Rules – Overseas Offering and Listing: Guidelines for the Offering of Global Depository Receipts Overseas by Domestically Listed Companies (the "GDR Guidelines"). On June 2, 2023, in accordance with the latest requirements provided in the GDR Guidelines, the Shanghai Stock Exchange and the Shenzhen Stock Exchange respectively promulgated the Interim Measures for the Listing and Trading of Depository Receipts under the Stock Connect Scheme between the Shanghai Stock Exchange and Overseas Stock Exchanges (Draft for Comment) and the Interim Measures for the Listing and Trading of Depository Receipts under the Stock Connect Scheme between the Shenzhen Stock Exchange and Overseas Stock Exchanges (Draft for Comment).
II. Information Disclosure Requirements Regarding GDR Investors
According to the GDR Guidelines, a domestically listed company shall, in accordance with Guideline No. 3 for the Application of Regulatory Rules – Overseas Offering and Listing: Guidelines for the Content of Reports (the "Guidelines No.3")1, disclose an issuance report within 15 working days after the GDR offering is completed. This report shall identify the actual subscribers of GDRs by looking-through the investors, state whether there are similar contractual arrangements such as swaps and the compliance of such contractual arrangements, and state whether investors extend the cross-border conversion period.
It remains to be seen how the above information disclosure requirements will be implemented, and further clarification by the regulators is needed, particularly on the following issues:
(1) It is unclear how the “actual subscribers of GDRs” are identified, i.e. whether this refers to the equity holders of the direct subscribers of GDRs, or refers to the ultimate beneficiary owners by looking through each level of the equity holders of the direct subscribers of GDRs. If the CSRC requires that the ultimate beneficiary owners shall be identified, the definition of “ultimate beneficiary owner” and whether “look-through” principles applicable to the verification of A-share listed companies’ pre-IPO shareholders should be used as a reference, needs further clarification.2 In addition, foreign institutions, as the direct GDR subscribers, may have confidentiality concerns to "look-through" and "disclose" the information of their equity holders. Therefore, these requirements may affect their investment decisions due to their strict internal risk control and compliance requirements.
(2) “Swaps or other similar contractual arrangements” may relate to an investor's investment strategies and business arrangements and confirming the compliance of such arrangements would require additional time and costs arising from seeking opinions of the local legal counsel where the investor resides, thereby possibly affecting GDR subscription and transaction timetables.
III. Our Observation of a Recent Case
In a recent case that has completed the GDR offering, the information disclosed in the relevant issuance report regarding investors’ subscription has the following noteworthy points:
(1) Where there is a cross-border swap arrangement, it states that “money outflow was achieved through the cross-border swap business of the relevant securities company.”
(2) Where there is a cross-border swap arrangement, the investor accepting offer of the swap is disclosed as the “actual subscriber of GDR”, but not looking through up to the ultimate beneficiary owner.
(3) Regarding the compliance of swap arrangements, it states that “the relevant securities company is a dealer approved by the CSRC to carry out cross-border swap business and investors’ subscriptions to GDRs through relevant cross-border swap arrangements meet the relevant compliance requirements.”
With respect to “looking through GDR subscribers”, “swaps” and “the extension of cross-border conversion periods”, unlike previous GDR regulatory rules, the CSRC clearly mentions the “disclosure” and “look-through” requirements in the GDR Guidelines. We tend to believe that the verification of GDR investors would be gradually implemented as a matter of practice, which means that the actual subscribers of GDRs, the swap arrangements, and the extension of cross-border conversion periods need to be properly disclosed in the issuance reports, while it remains to be seen how the CSRC would determine on a case-by-case basis the practical standards of disclosure based on the actual conditions of the market and investors.
We will continue to monitor developments regarding regulations and practice and keep our clients informed.
1. According to Guideline No.3: (1) after an overseas offering and listing is completed, the issuer shall report information regarding the overseas offering and listing in accordance with these Guidelines. These Guidelines apply to an issuer's initial public offering or listing overseas, and the offering of securities overseas after an overseas listing, and other circumstances; (2) except for public offerings, if it involves an issuance to specific investors, such as a private placement or underwriting, the issuer shall state the following matters in tabular form: the investors’ name, type (such as a cornerstone investor or an anchor investor), the registered location, subscription quantity, restricted sale period (or restricted conversion period), and the proportion of subscribed shares in the total share capital after the issuance. If any subscriptions are made indirectly through financial products, the actual subscribers shall be stated; if this cannot be provided, an explanation shall be given ...
2.According to the Understanding and Application of the "Ultimate Holder" in the Verification of Shareholder Information adopted on the STAR Board and the ChiNext, ultimate holders includes natural persons, listed companies (including overseas-listed companies), public companies such as companies listed on the National Equities Exchange and Quotations, state-controlled or managed entities (including public institutions and industrial funds that are controlled by state-owned entities), collective ownership enterprises, foreign government investment funds, university endowment funds, pension funds, public welfare funds and publicly offered asset management products. Other foreign shareholders can be deemed as an "ultimate holder" if intermediaries can confirm through appropriate verification that no investor of the foreign shareholder is a domestic entity, and fully certify that there is no obvious abnormality in the share purchase price of the foreign shareholder.
