On February 11th, 2022, the China Securities Regulatory Commission (CSRC) published new provisions on the Supervision and Administration of Depository Receipts under the Stock Connect Scheme between domestic and overseas stock exchanges.
Since the launch of the Shanghai-London Stock Connect, four listed companies on the Shanghai Stock Exchange have listed global depositary receipts (GDRs) on the London Stock Exchange, paving the way to expand an important two-way cross border financing channel.
The scheme has extended to the Shenzhen Stock Exchange, allowing eligible listed companies to apply to issue GDRs the southern Chinese city also, including U.K listed firms.
“Not only do these revisions help Chinese domestic companies raise capital in London, but it will also create opportunities for U.K. issuers to raise capital from Chinese institutional investors,” Jon Edwards, Chief Representative, Primary Markets, Asia, London Stock Exchange said on a March 15 webinar titled “How UK companies can access Chinese Capital.”
How is the London-Shanghai Stock Connect different than the others?
The hope of the Shanghai-London Stock Connect is that it truly brings the east to the west and west to the east. The key difference from other stock connects compared to the Shanghai-London Stock Connect is that it is purely issuer led. Unlike the Hong Kong Connect that focuses on a group of issuers being eligible, with the Shanghai-London Stock Connect, the issuer can make the decision to list overseas on their own. The idea is to create three connected liquidity pools – London, Shanghai, and Shenzhen where companies can apply to be listed on other stock exchanges when they feel ready.
This is achieved by using a network of designated brokers, according to information given to the webinar’s attendees. The brokers can access the underlining shares of one market, and then convert them to depositary receipts for another market within the pool of exchanges. The London Stock Exchange has determined that this provides cash fungibility, where investors are able to receive the underline shares’ cash value.
For U.K. issuers going to Shanghai or Shenzhen to go public, it would be the first time Chinese companies can access these their shares – an innovation in cross-border fund raising.
Regulatory framework changes
There has been a lot of updates regarding the rules behind the Shanghai-London Stock Connect, especially on the Chinese Depository Receipt (CDR) side.
“Why are we reintroducing a programme that has been around for two years? The key change on the CDR side has been the allowance of capital raising from the CDR issuer. In previous rules, an issuer needed to use underline shares build up liquidity before passing these to the Shanghai market. It will now be possible for London issuers to raise new capital in China. This makes it a lot more attractive to get off the ground from a risk perspective,” said, Thomas Abbott – Senior Product Manager, Capital Markets at London Stock Exchange.
Other changes that the CSRC and the two exchanges have made are around directors’ liabilities. Previously there had been a focus on looking at how Chinese law would apply to foreign issuers, with directors of foreign companies needing to sign direct undertaking that they would be willing to accept that all documents were done under China’s regulations. This was difficult for directors to take, especially with the major differences between Chinese and British Common Law. Realizing these differences, the exchanges and the CSRC have changed them. Now it is possible to sign an undertaking that affirms that all key documents are in line with their home market’s regulations. This makes much easier for directors to present their documents to Chinese regulators.
Even though much more transparency has been made with Chinese listing rules, there are still grey areas on delisting procedures and disclosures would work in the real world, according to information presented by the London Stock Exchange.
The other great change comes from the investor side, according to Abbott. Previously an investor would need a minimum of RMB3 million ($471,616) under management, but it has been reduced to RMB500,000 and is in line with the Hong Kong Stock Connect Programme. This not only adds more investors to the market, but it also ensures that there is significantly more liquidity.
Thomas Samuelson, CEO at BRON said during the webinar, “Regulatory changes have happened quickly recently, and this is good for U.K. companies that are seeking to raise capital from Chinese institutional investors.”
“The demand is there. I have done some no-deal road shows with some prominent U.K. companies in China, and the demand was there, and regulators were happy to work with them to get them listed on the Shanghai Stock Connect if they wanted to,” Samuelson said.
Which U.K.-listed companies can list in China?
There is a minimum market capitalization of RMB20 billion. In the exchange rules, issuers must be listed for at least three years on their home market, but these rules are still being confirmed.
In terms of the share capital, around 10-15% of an issuer’s shares would be transferred into CDRs. At the initial listing, there is a minimum requirement of 50 million CDRs.
The application for U.K. companies to apply to list on the Shanghai Stock Exchange is like what foreign companies must present to the U.K. regulator to list on the London Stock Exchange, according to Abbott. It is standard process that U.K. issuers would be used too. This would be all done in Chinese.
Building a deal team
U.K. and Chinese parties’ involvement are crucial in building a successful deal making team, according to information presented at the webinar. There is a need for a sponsor, which will oversee the overall coordination of the deal and working with both country’s regulators. They will also oversee looking into the due diligence and overall preparation of the documents. The sponsor could be the lead underwriter, or another party could be involved in terms of crafting the equity story and the creating the marketing materials.
The underwriting will require its own legal counsel. Counsel will be needed in the U.K for issuing the CDRs also. They will require need a bank as a financial advisor, which will require certain overseas licenses. A Chinese bank can also be a financial advisor for a U.K. firm seeking to list in Shanghai or Shenzhen.
On the auditing side for U.K. issuers, in certain circumstances when there are major differences in accounting standards, the UK’s Financial Reporting Council must be contacted to ensure that all the documents are accurate, transparent and reflect integrity. Sometimes legal counsel from China will be needed also if the listing is complex.
A U.K. firm that decides to list in Shanghai or Shenzhen must appoint a custodian to hold the shares. There will be a need to work with public relation firms in both countries, along with translation firms to help translate every document required for listing, according to information from the London Stock Exchange that was presented during the webinar.
CDR listing process overview
There are four main steps that a U.K. issuer will have to take to get listed on the Shanghai Stock Exchange according to the London Stock Exchange’s material that was presented during the webinar:
- Internal decisions and submissions to exchange
- Issuer takes necessary steps to build team and application documents.
- Exchange decides whether to accept application for formal pre-review, which will happen with five working days.
- 30 working days to supplement documents if necessary.
- Pre-review
- Exchange formally accepts application for pre-review.
- Issuer to disclosure documents in exchange’s website.
- Within 10 working days the exchange’s pre-review department will provide written feedback via the sponsor.
- If all is in order, the U.K. issuer will be passed to Listing Committee.
- Prereview opinion and approval
- Listing Committee to provide a pre-review opinion within four days from application at start of the second stage.
- Overall time for issuers and advisors to respond should be no greater than three months.
- Exchange submits pre-review opinion to CSRC, issuer submits prospectus and supporting documents for approval.
- Issuance and listing
- When the opinion is submitted, prosecutes and supporting documents are posted on CSRC and the exchange’s website.
- Issuer and advisors choose appropriate listing window.
- Roadshow is booked.
- Stock exchange officially approve the listing and announces it.
