On the CSRC press conference on April 11, 2014, spokesperson Zhang Xiaojun delivered an update on the CSRC’s efforts to carry out special regulatory activities associated with commitment and performance, announced the restructuring of key duties and responsibilities of 9 functional departments, including the Department of Public Offering Supervision (see news release on the official CSRC website for further details). A Q&A session was included in the press conference.
Q1: The CSRC released a regulatory Q&A statement on March 27, suggesting companies to choose appropriate timing for their IPO applications and encouraging them to finance their growth through NEEQ listing, overseas listing and other means. Recently, some media have reported that market participants interpreted this as a signal that the IPO application window was closed again. What is the CSRC’s take in this regard?
A: In relation to the suggestion for issuers and sponsors to choose appropriate timing for their IPO applications, the CSRC has made a further explanation at the press conference on March 28. The said regulatory Q&A statement is by its nature a suggestion of the CSRC in response to concerns of the market, which is not compulsory and does not mean that the IPO application window is closed. The CSRC would like to remind issuers and sponsors to seriously consider the current special circumstances for careful planning and rational choice of financing options and leverage the multi-level capital market to seek financing solutions through multiple channels, so as to avoid excessive concentration in the already congested IPO channel and any adverse impact on their growth and development; those who really intend to raise capital through IPOs are suggested to choose appropriate application timing to avoid additional costs and burdens.
Q2: The exposure draft of the Administrative Measures for IPOs on the ChiNext relaxed the financial metrics requirements for access to the ChiNext. Will it drive the IPO applications by some less qualified companies?
A: As a part of the reform of the ChiNext, the appropriate relaxation of financial metrics requirements for access does not mean a 「flood」 to the ChiNext market. On the one hand, for reform towards IPO registration system and promoting the decisive role of market in resource allocation, it is an important step to relax the financial metrics requirements for access and subject the fate of the listed companies to choice of the market and decisions by investors; on the other hand, such relaxation cannot be translated as deregulation. The regulatory authorities will focus on information disclosure to strengthen concurrent and a posterior regulation and urge intermediaries to exercise due diligence to protect the legitimate rights and interests of investors.
Q3: What is the progress in developing (revising) relevant supporting documents for the new share offering reform? When will it be completed?
A: In order to implement the relevant requirements for the new share offering reform, as of to date, the CSRC has completed the development and revision of the Measures for the Administration of Securities Offering and Underwriting, the measures for transfer of old shares and other documents, and improved relevant information disclosure rules. Meanwhile, in order to implement the Opinions on Further Enhancing the Protection of Small- and Medium-sized Investors』 Rights and Interests Issued by the General Office of the State Council, the CSRC is accelerating the development of provisions in relation to the dilutive effect of IPO, subsequent financing and major asset restructuring on current returns and implementation of remedies. Any progress in this regard will be announced in due course.
Q4: What is your comment on Internet-based securities business carried out by securities companies?
A: Internet-based securities business is an important complement to our multi-level capital market and an inevitable result of the development of information technology, e-commerce and financial innovations. At a recent State Council executive meeting, it was proposed to "promote the healthy development of Internet-based financial services and improve the competitiveness of securities and futures services". The CSRC has always attached great importance to Internet-based securities business conducted by securities companies and required the Securities Association of China (SAC) to make active efforts in studying and promoting related business practices of securities companies.
Recently, the SAC has received Internet-based securities business plans from a number of securities companies (primarily for improving their systems for client account services via the Internet). Among others, 6 securities companies, namely, CITIC Securities, Guotai Junan Securities, Galaxy Securities, Great Wall Securities, Ping An Securities and HuaChuang Securities, have developed relatively sound business plans with complete supporting materials. After an expert panel review on their business plans organized by the SAC, the 6 companies have, based on expert comments, made a number of revisions and improvements to their business plans. After appropriate procedures, the SAC approved pilot operations of Internet-based securities business by the 6 companies on April 4.
The Internet-based securities business plans of the 6 companies are all focused on client demand and oriented towards enhancing client experience. Based on their own situation, the companies' existing businesses or platforms are integrated or restructured to varying degrees, representing the current understanding and general practice of Internet-based securities services of securities companies.
While approving their pilot business operations, the SAC has also required the 6 companies to strengthen account and fund management to ensure capital and information security for clients; improve their IT systems to prevent network security vulnerabilities; and enhance information and risk disclosure, implement investor education and strengthen investor suitability management.
In the process of Internet-based securities business conducted by the 6 companies, the SAC will follow up with monitoring and analysis of the business, sum up lessons learned and identify problems, so as to establish business rules over time to promote disciplined development of Internet-based securities business of securities companies.
The CSRC will follow the principle of "moderate regulation, classification regulation, collaborative regulation and innovative regulation" to support securities institutions in transforming their conventional business with the Internet and other modern technologies, unify regulatory standards for both online and offline operations and promote the healthy development of Internet-based financial services.
Q5: What are the implications of Shanghai-Hong Kong Stock Connect for QFII, QDII and RQFII?
A: Shanghai-Hong Kong Stock Connect shares something with QFII, QDII and RQFII mechanisms, as they all are special arrangements intended to further expand cross-border investment options and enhance the opening up of capital markets against the backdrop that China's capital account is not fully open yet.
In terms of mechanism arrangements, however, Shanghai-Hong Kong Stock Connect is quite different from QFII, QDII and RQFII: (1) Different service carriers. Under Shanghai-Hong Kong Stock Connect, the two exchanges act as service carriers to establish mutual market access for routing orders in order to achieve cross-market investment; while under QFII and other mechanisms, asset management companies act as service carriers to raise funding for investment by offering financial products to investors. (2) Different ways of investment. Shanghai-Hong Kong Stock Connect comprises a Southbound Trading Link for mainland investors to invest in the Hong Kong market and a Northbound Trading Link for Hong Kong investors to invest in the Shanghai Stock Exchange (SSE) market; while QFII and others are all one-way investment. (3) Different trading currencies. Shanghai-Hong Kong Stock Connect allows only Renminbi (RMB) as the trading currency and thus investors have to invest with RMB funding; while QFII investors may invest with U.S. dollar and other foreign currencies. (4) Different controls of cross-border capital flows. Under Shanghai-Hong Kong Stock Connect, capital flows are controlled in a closed path where proceeds from disposal of securities must be repatriated along the original route and cannot be retained in the local market; while under QFII and other mechanisms, proceeds from trading securities can be retained in the local market. (5) Different discretion of investor. Shanghai-Hong Kong Stock Connect will open a cross-boundary investment channel for investors of both markets, by which investors can freely choose the eligible stocks under the pilot programme for direct investments; while under QFII and other mechanisms, quota application, investment decision and information disclosure are all conducted by asset management companies, and investors invest indirectly in the other market without being able to freely choose the underlying assets.
In summary, Shanghai-Hong Kong Stock Connect will have better synergy with QFII, QDII, RQFII and other existing mechanisms rather than have an impact on their normal operations, and will provide investors with more flexible cross-border investment options and play a positive role in facilitating the two-way opening up of China's capital markets.
Q6: Will the Shenzhen Stock Exchange be included in the pilot programme for establishing mutual stock market access between Mainland China and Hong Kong in the future?
A: The Shenzhen Stock Exchange is not included in the pilot programme for the time being, given the following considerations: (1) It contributes to a smooth opening up of China's capital markets. Shanghai-Hong Kong Stock Connect is an important exploration in promoting the internationalization of China's capital markets, for which relevant mechanism arrangements are yet to be improved in practice. Initially, it is more prudent to develop a pilot programme operated by the Shanghai and Hong Kong exchanges. (2) It helps to prevent risks. As the valuation gap is not significant between the Shanghai and Hong Kong markets, Shanghai-Hong Kong Stock Connect will have less impact on their market valuation levels, which is helpful for a smooth start of the pilot programme. (3) It is based on the needs of exchanges themselves. The Shanghai and Hong Kong exchanges have, based on their market positioning and after commercial negotiations, independently chosen to partner with each other by establishing mutual stock market access. On the basis of the pilot experience of Shanghai-Hong Kong Stock Connect, the Shenzhen and Hong Kong markets will be better positioned to independently explore various forms of partnership, including mutual stock market access, from a higher starting point. The CSRC will also, as always, continue to support the Shenzhen and Hong Kong markets to strengthen cooperation and exchanges.
Q7: It will take another 6 months to launch Shanghai-Hong Kong Stock Connect. What are the necessary preparations for formal launch?
A: Next, we will follow the 「orderly and controllable」 principle to coordinate with all parties involved for active efforts in the following preparatory work: (1) Further improve the scheme, optimize business processes, and introduce regulatory documents and supporting measures to make technical preparations. (2) Communicate with the Securities and Futures Commission (SFC) of Hong Kong on business regulation and cross-border enforcement issues, supplement the existing Memorandum of Regulatory Co-operation (MORC) and coordinate the execution of the cooperation agreement between the Shanghai and Hong Kong exchanges for mutual stock market access. (3) Develop detailed rules and regulations for means of trading, trading hours arrangement and information disclosure as well as contingency plans. The preparatory work will take approximately 6 months.
Q8: What arrangements will be in place for strengthening bilateral regulatory cooperation and protecting investors' legitimate rights and interests in the future?
A: For the regulation of market players, we will follow the general principle that the existing laws, rules and investors' trading practices in the two markets should not be changed. The regulatory authority for Shanghai-Hong Kong Stock Connect covers listed companies, securities companies and securities trading service companies. Specific arrangements are as follows: (1) For regulation of a listed company, the jurisdiction is allocated based on its listing venue. (2) For regulation of a securities company, the jurisdiction should, in principle, be allocated to the local regulators where its license was granted. Meanwhile, if a securities company is engaged in cross-border securities trading activities on behalf of investors under Shanghai-Hong Kong Stock Connect, overseas regulators may regulate its cross-border trading activities. (3) For a company to be established by an exchange in the other market for routing orders (a securities trading service company), its license will be granted by and it will be subject to regulation by the regulators of such other market.
Investor protection is based on the trading venue; namely, the regulators of the market in which an investor makes investments will be responsible for regulation. Investors are also entitled to file a civil suit for compensation at a court of competent jurisdiction under the foreign-related civil procedure law and seek enforcement through bilateral judicial assistance mechanisms to safeguard their legitimate rights and interests. Specific mechanism arrangements are as follows: (1) At the regulatory level, the CSRC and the SFC will, based on the MORC signed in 1993 and the side letters thereof, further enter into supplemental agreements on specific cross-border regulatory issues involved in Shanghai-Hong Kong Stock Connect, which provides for specific arrangements in respect of the addressing of differences in definition of illegal trading practices such as insider trading and market manipulation, regulatory information sharing mechanism, referral and information exchange mechanisms concerning violations, assistance in investigation and evidence collection and cooperation for enforcement of relevant regulatory measures. (2) At the exchange level, the Shanghai and Hong Kong exchanges will, based on the MORC, enter into a Supplemental Agreement on Regulatory Cooperation to define the specific regulatory cooperation mechanisms for Shanghai-Hong Kong Stock Connect. (3) Given there is no existing agreement on judicial assistance between Mainland China and Hong Kong, cross-border civil and criminal enforcement activities can only be conducted on a case-by-case basis. Although there has been cooperation at the administrative enforcement level, there is still a lack of adequate legal basis. The issue of cross-border judicial assistance will be resolved over time through active efforts based on the practice of Shanghai-Hong Kong Stock Connect.
Q9: What is the CSRC’s take in termination of listing of Nanjing Tanker Corporation?
A: On April 11, 2014, the SSE announced its decision to terminate the listing of Nanjing Tanker Corporation, which became the first delisted company this year.
Since May 14, 2013, the shares of Nanjing Tanker Corporation have been suspended from trading by the SSE after three consecutive loss-making years of 2010, 2011 and 2012. On March 22, 2014, Nanjing Tanker Corporation released its annual report for 2013, with net profit attributable to shareholders of listed company of -RMB5.922 billion for the year of 2013 and net assets attributable to shareholders of listed company of -RMB2.097 billion at the end of 2013. ShineWing Certified Public Accountants issued an audit report with a disclaimer of opinion on the company's 2013 annual financial statements. On April 11, 2014, the SSE made a decision to terminate the listing of shares of Nanjing Tanker Corporation as the delisting conditions provided in the Stock Listing Rules were triggered by Nanjing Tanker Corporation.
Under the Stock Listing Rules, a company’s shares will enter the delisting preparation period from the immediately next trading day upon expiration of the period of five trading days after the date of announcement on termination of listing. The delisting preparation period lasts for 30 trading days. During the delisting preparation period, the company's shares will continue to be traded, but subject to an up/down limit of 10% rather than 5% applicable to other stocks trading on the risk warning board. For details, investors may refer to the company’s risk warning notice about potential delisting. The company’s shares will be terminated from listing on the day immediately following the expiration of the delisting preparation period, and the company will be delisted by the SSE.
The company’s corporate governance, operating status and shareholders' rights will not be changed as a result of delisting. Under the Stock Listing Rules of the SSE, the company shall make arrangement immediately for its shares to enter the OTC system and ensure that its shares will be quoted on the OTC system within 45 trading days following the expiration of the delisting preparation period. After the shares of Nanjing Tanker Corporation are listed on the OTC system, its shareholders can transfer such shares in accordance with the relevant business rules of the OTC system. The company will continue to perform the obligations of information disclosure in accordance with the regulatory requirements for non-listed public companies.
After the termination of listing, the company may submit an application for relisting under the Implementation Measures of Shanghai Stock Exchange for Relisting of Delisted Companies, provided that the company satisfies the relisting conditions provided in the Stock Listing Rules.