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On August 13, SZSE released the Business Guidelines No. 2 for the Issuance and Listing Review of Corporate Bonds – Investor Protection (Reference Text) (the “Investor Protection Guidelines”), providing a reference guide on the content of relevant chapters on investor protection for drafting a prospectus. It is an important measure of SZSE to implement in depth relevant requirement of intensifying investor protection as specified in the new Securities Law, conscientiously put in place the requirements of CSRC on fostering an investor protection environment, refine the basic regulations of the capital market, and improve law-based, honest and standard operation of corporate bond issuers.
The Investor Protection Guidelines follows the market- and rule-of-law-based principles and combines the practices of handling corporate bond default risks. It aims to make the content involving investor protection in prospectuses more systematic and standard, strengthen ex ante constraint on issuers. Specifically it has the following three features:
First, building a scientific and complete system and further standardizing the clauses. Since the implementation of the registration-based issuance system of corporate bonds, with listing rules as the core and investor suitability management measures and duration related business guidelines as the backbone, SZSE has released series of supporting and supplementary rules including the guidelines on major concerns of review, relevant business guidelines on prospectuses and information disclosure, and the reference text of the rules of holders’ meetings, building an investor protection mechanism that covers the whole process. The Investor Protection Guidelines has further standardized the contents of four respects, namely, special issuance clauses, credit enhancement mechanisms, investor protection clauses, violations, and dispute resolution mechanisms. Meanwhile, it has defined the applicable scope, streamlined the handling procedures, and clarified the rights and obligations of issuers, guarantors, trustees and investors, further improving the multi-measure, all-round investor protection system.
Second, focusing on the concerns of market entities and stressing the pertinency of clauses. Regarding special issuance clauses, the Investor Protection Guidelines has refined the methods for adjusting coupon rates, laid down the procedures for resale declaration period amendments and information disclosure requirements, and focused on solving disputes that may arise when option clauses are applied. Regarding credit enhancement mechanisms, according to the Civil Code and relevant judicial interpretation, it has streamlined and improved the rights and obligations arrangements of parties involved in traditional bond guarantee types such as warranty, mortgage and pledge, and included innovative credit enhancement mechanisms like debt accession and third-party purchase commitment. Regarding investor protection clauses, for problems that seriously affect issuers’ solvency and that the market is highly concerned about such as cash flow shortage, a high debt leverage ratio, asset transfer at a price lower than the reasonable price, important subsidiaries undergoing bankruptcy proceedings and non-standard product defaults, it has made targeted commitment arrangements including issuers’ debt repayment guarantee measure commitment, financial commitment, behavior restriction commitment, credit maintenance commitment, and cross protection commitment, to strengthen the ex ante constraint on issuers. Regarding violations and dispute resolution mechanisms, it has defined six types of violations and six ways to take the liability for breach of contract, to avoid unclear clauses that may make it difficult for investors to claim for compensation.
Third, taking into account the rights and interests of all participants and keeping clauses flexible. By restricting issuers’ behaviors to prevent bond default risk, the Investor Protection Guidelines has not only strictly regulated the bottom line of issuers’ behaviors but also effectively protected investors’ rights and interests. On the one hand, with the Investor Protection Guidelines being positioned as a reference text, issuers can choose applicable “toolkits” offered in the Investor Protection Guidelines based on their own situations or their communication with prospective investors, and prepare relevant content in a prospectus with reference to the Investor Protection Guidelines. On the other hand, when providing protection and remedy measures for investors, the Investor Protection Guidelines has introduced a grace period and exemption mechanisms, to make issuers more proactive to eliminate negative cases and restore credit standing and solvency.
Investors are the foundation of the development of the capital market, and protecting investors’ legitimate rights and interests is essential to cement the position of the capital market which stands on the side of the people. SZSE will, centering on the goal of “building a standard, transparent, open, dynamic and resilient capital market”, earnestly practice the principles of “system building, non-intervention, and zero tolerance” and the requirements of “standing in awe of the market, rule of law, professionalism and risks and pooling the efforts of all sides to develop the capital market”. We will continuously strengthen the supply of regulations on investor protection, strictly perform the regulatory duties as an exchange, and clearly define intermediaries’ responsibilities, to provide effective “regulatory protection” and sufficient remedy channels for investors, build an open, fair and impartial market environment, and maintain the long-term, healthy and stable development of the exchange-traded bond market.
