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Q1: The preparations for the introduction of the science and technology innovation board and the pilot registration-based IPO system made by the Shanghai Stock Exchange (SSE) have been in full swing. Can you brief us on the progress?
A: On November 5, 2018, CPC General Secretary Xi Jinping announced at the first China International Import Expo that the Science and Technology Innovation Board and the pilot registration-based IPO system will be introduced on the SSE. The SSE has earnestly studied the requirements of General Secretary Xi Jinping's important speech, and thoroughly implemented the requirements made at the Central Economic Work Conference. For more than two months, we have concentrated our efforts, seized every minute, and tried our best to make the introduction of the science and technology innovation board and the pilot registration-based IPO system a success as soon as possible.
Relevant efforts and preparations have been made under the firm leadership and overall planning of the Party committee of the China Securities Regulatory Commission (CSRC). The Shanghai Party Committee and the Shanghai Government have paid much attention and provided strong support, and all market participants have vigorously participated in accelerating the process. We have been committed to reform, coordinated advancement and through implementation, and the preparations for the introduction of the science and technology innovation board and the pilot registration-based IPO system are progressing smoothly. The efforts have been made mainly in the following two aspects.
On the one hand, we have strengthened the leadership so as to effectively fulfill our important responsibility of reform and innovation. The introduction of the science and technology innovation board and the pilot registration-based IPO system is a major reform initiative to implement the innovation-driven development strategy, strengthen the support of the capital market for improving China's capacity for innovation in key and core technologies, boost the development of the high-tech industries and the strategic emerging industries, bolster the efforts in building Shanghai into an international financial center and a science and technology innovation center, improve the fundamental system of the capital market and drive high-quality development. The Party committee of the SSE is highly aware that the introduction of the science and technology innovation board and the pilot registration-based IPO system on the SSE is of great importance for both the exchange and the capital market; it will provide a significant opportunity for addressing the weakness of the capital market in supporting the science and technology innovation, and will be key to improving the fundamental market system. In order to perform the task of reform and innovation well, the Party committee of the SSE set up a leading group to ensure structural support. At the same time, the SSE established 6 working groups responsible respectively for the preparation for the science and technology innovation board, the preparation for the registration-based IPO system, the supervision of listed companies, the coordination of systems, the preparation for technical operation and the comprehensive support. Each group has clear-cut responsibilities and performs its own functions. With these measures, the SSE has made every effort to implement the reform and innovation requirements in designing and carrying out the business plans and supporting systems.
On the other hand, we have rallied support from all SSE departments for the key tasks of advancing the rules, businesses, supervision, technology in a coordinated way. According to the overall planning and requirements, , we focused on the coordinated design and implementation of the supporting systems for issuance, listing, trading, information disclosure, delisting, etc in preparing for the establishment of the science and technology innovation board. In the preparation for the pilot registration-based IPO system, we attached importance to improving the market-driven stock issuance and underwriting mechanisms, and made efforts in adjusting and optimizing the principles, standards, mechanisms and procedures of the issuance and listing review. The relevant institutional arrangements of the SSE are mainly reflected in the 6 sets of supporting business rules for which the opinions are being solicited currently, including the “Rules of Shanghai Stock Exchange for Review of Issuance and Listing of Stocks on the Science and Technology Innovation Board” (the “Review Rules” for short), the “Implementation Measures of Shanghai Stock Exchange for Issuance and Underwriting of the Stocks on the Science and Technology Innovation Board” (the “Issuance and Underwriting Measures” for short), the “Rules of Shanghai Stock Exchange for Listing Stocks on the Science and Technology Innovation Board” (the “Listing Rules” for short), the “Special Provisions of Shanghai Stock Exchange on Trading of Stocks on the Science and Technology Innovation Board” (the “Special Provisions on Trading” for short). In addition, we have accelerated the technical transformation of the trading system and the development of the electronic review system for issuance and listing, both of which exemplify the distinct trading mechanism of the science and technology innovation board, and relevant preparations are largely completed. Meanwhile, we have also sped up the preparations in other areas including providing market service for science and technology innovation enterprises, guarantee of human resources, media publicity and investor education. Supporting plans are also being implemented.
Q2: There are 6 sets of rules on which the SSE is soliciting opinions this time. Can you brief us on them？
A: The science and technology innovation board and the pilot registration-based IPO system must be advanced in a coordinated manner. We must carefully weigh the relationship between the primary market and the secondary market, improve supporting rules of stock issuance, mergers, acquisitions, reorganization and delisting, and strengthen the responsibilities of various entities including issuers and intermediaries. Therefore, it is a complicated systemic institutional reform. The "Implementation Opinions on Establishing the Science and Technology Innovation Board and Piloting the Registration-based IPO System on the Shanghai Stock Exchange" (the "Implementation Opinions" for short) clearly stipulates the overall planning, key points and core systems in the introduction of the science and technology innovation board and the pilot registration-based IPO system, and provides definite requirements on how to carry out institutional reform and innovation at the level of exchange. The business rules on which the SSE is soliciting opinions have been formulated in accordance with the "Implementation Opinions" and the relevant regulations of the CSRC. They constitute the institutional base for the reform. The rules for the solicitation of opinions are mainly in four aspects.
First of all, they include issuance and listing review rules related to the pilot registration-based IPO system are involved. According to the division of responsibilities, the SSE shall review of the issuance and listing on the science and technology innovation board in accordance with the principles of and requirements for the pilot registration-based IPO system. To this end, the "Review Rules" have been formulated to provide explicit provisions on reconciling the scope, mechanism, method and procedures of the review, the arrangements for the linkage of the SSE review for issuance and listing with the CSRC arrangement, the responsibilities of all parties involved and self-regulation. At the same time, for the Listing Committee and the Advisory Committee that assume distinct responsibilities in the review for issuance and listing, the SSE has respectively formulated the “Measures of Shanghai Stock Exchange for the Administration of Listing Committee for Stocks on the Science and Technology Innovation Board” (the “Listing Committee Administration Measures” for short) and the “Working Rules of Shanghai Stock Exchange for the Science and Technology Innovation Advisory Committee” (the “Working Rules for Advisory Committee” for short). They provide the composition of the members, the scopes of duties, the operational mechanisms and other matters for the committees.
Secondly, they include issuance and underwriting rules related to the market-driven issuance of stocks on the science and technology innovation board. In the issuance of stocks on the market of the science and technology innovation board, it is imperative to carry out the necessary reforms simultaneously in accordance with the principle of market dominance and intensified constraints. The prices, sizes and frequencies of the issuance shall be mainly determined in a market-based manner, and institutional investors shall be the major participants in the inquiry, pricing, allotment and other processes. To this end, the "Issuance and Underwriting Measures" has been formulated to provided unified rules f for the eligibility of and the quotation requirements for the inquiry participants, the offline initial allotment ratio, the offline and online clawback mechanism, the strategic allotment, the over-allotment options and other issues in the process of issuing and underwriting stocks on the science and technology innovation board.
Thirdly, they include rules related to the continuous supervision after the issuance and listing. It is necessary to make targeted and differentiated institutional arrangements for the science and technology innovation board on the basis of the positioning of the board and the characteristics of the companies listed on the board. To this end, a separate “Listing Rules” has been developed to set up a system of continuous supervision rules centered on the listing rules. In view of the positioning of the science and technology innovation board, the inclusive listing requirements have been set up for different types of enterprises to access the capital market, and the more stringent delisting system that helps ensure the survival of the fittest in the market has also been formulated; in addition, given the characteristics of the science and technology innovation enterprises, necessary adjustments and improvements have been made in information disclosure, different voting rights, continuous supervision, shareholding reduction, equity incentives and other matters.
Fourthly, they include trading rules accommodated to the trading on the secondary market of the science and technology innovation board. The prospective listed companies on the science and technology innovation board are characterized by new business models and significant uncertainties. Given that, it is important in the design of related trading mechanisms to balance the relationship between prevention of excessive speculation and guarantee of the market liquidity, and make necessary innovations in the trading mechanism. To this end, the "Special Provisions on Trading" has been formulated to provide unified rules for introducing the investor suitability system, moderately relaxing the price limits, adjusting the volume of a single order, opening the margin trading and securities lending business on the first day of listing, and other issues. It overrides the current “Trading Rules”.
In the next stage of soliciting opinions on the rules, the SSE will continue to listen to the opinions and suggestions of the market participants through symposiums, seminars and other means. After the public consultation phase, the supporting business rules will be revised and improved according to the feedback of all parties concerned. After being approved by the CSRC, the rules will be promulgated in a timely manner.
Q3: The development of a market-driven issuance and underwriting system is a realistic requirement for the launch of the science and technology innovation board, which the market participants follow closely. At present, what distinct institutional arrangements are made in the SSE's “Issuance and Underwriting Measures”?
A: The issuance and underwriting system is fundamental to the stock issuance on Science and Technology Innovation Board. At present, the guiding principle is that the price, scale, and pace of new share issuance shall mainly determined by market-based methods, and effective constraints shall be strengthened at the same time. In light of that, the exchange has made distinct arrangements in the business rules as follows:
First of all, we establish market-based inquiry, pricing and allotment mechanisms with institutional investors as the main participants. First, professional institutional investors are the only participants in the inquiry and pricing process. Investors need more investment experience and higher risk tolerance to engage in the science and technology innovation board. Given that, we replace the direct pricing method with the market-based inquiry and pricing. The inquiry targets for the initial public offering are limited to seven types of professional institutions including securities companies and fund companies. They are allowed to submit at most three sets of planned subscription prices for different allotment targets under their management. After the pricing is completed, if the issuer's total market capitalization cannot meet the listing standard selected in the prospectus, the issuance will be suspended. Second, the information disclosure and risk disclosure for offline quotes have been intensified to facilitate adequate price discovery. It is required that to step up market supervision information including the median and the average of the valid quotes after the offline institutional investors removing the highest quote and the median and the average of the quotes offered by the three kinds of the market’s main long-term investors including the securities investment funds established by public offering, the national social security funds and the basic endowment insurance funds shall be disclosed before the online subscription. If the issue price exceeds the aforementioned median or average, an investment risk announcement shall be issued before the subscription so as to fully reveal the risks. Third, the proportion of offline allotment is increased. The proportion of the offline initial offering is increased by 10%, and the offline initial offering volume to be clawed back to the online offering is reduced. After the clawback, the proportion of offline issuance shall be no less than 60% in order to strengthen the constraints of quotes offered by offline institutional investors and guide rational participation by all kinds of investors. At the same time, it is stipulated that after the clawback, the proportion of offline issuance shall not exceed 80% to retain the proportion of online investors' subscription. Fourthly, the subscription unit for online investors is reduced. The provision of “Only investors holding shares worth more than RMB10,000 of market capitalization on the SSE can participate in online issuance” is retained, and the current subscription unit of 1,000 shares per lot is reduced to 500 shares per lot, with the market value corresponding to each subscription unit being cut to RMB5,000 accordingly so as to enhance the inclusiveness of the online investors subscribing for new shares on the science and technology innovation board.
Secondly, strategic investors and the issuers’ executives and core employees are encouraged to participate in the IPO. First, the implementation conditions for the strategic allotment are relaxed by allowing the issuers with an IPO volume of more than 100 million shares to carry out strategic allotment; issuers with less than 100 million shares in the IPO volume, and those that allot less than 20% of the total IPO volume to the strategic investors can also carry out strategic allotment. Second, the issuer’s executives and employees are allowed to participate in the strategic allotment of the issuer’s stocks through the Specific Asset Management Plan. The issuer is required to adequately disclose the information on the participation of the executives and core employees in the allotment in the prospectus; the shares issued through the strategic allotment to be reduced after the listing shall be disclosed in advance according to the provisions, so as to strengthen the market constraints. According to past experience at home and abroad, the arrangement for the allotment to the strategic investors is effective in introducing incremental funds into the market and helping issuers with the issuance. The establishment of the subscription mechanism for the issuers’ executives and core employees is conducive to delivering positive signals to investors.
Thirdly, the role of securities companies in issuance and underwriting is brought into further play. The capital constraints for the sponsoring institutions are strengthened to ensure their performance of responsibilities. To this end, the entities such as relevant subsidiaries of the issuer’s sponsoring institutions are allowed to participate in the share allotment as strategic investors with a certain lock-up period. The SSE will guide the lead underwriters in cultivating long-term clients, enhance the capacity of the lead underwriters for stock allotment, and help the investors in the primary market to be more professional. To this end, the securities analysts of the lead underwriters are required to issue research reports on investment value during the road show. The securities companies that underwrite the stocks should collect brokerage commissions from the investors to whom the stocks are allotted through strategic allotment and offline allotment, and the mechanism is designed with certain room for the lead underwriters to independently select the inquiry targets and cultivate long-term quality clients. At the same time, in order to strengthen the effective regulation of the issuer's shareholders’ reducing the pre-IPO shares by the sponsoring institutions, the shareholders are required to put the pre-IPO shares held by them under the custody of the sponsoring institutions before the issuer's listing. In addition, the issuers and lead underwriters on the science and technology innovation board are allowed to adopt the over-allotment option to make the stock prices more stable after the listing of IPO shares on the science and technology innovation board.
In addition, in order to ensure the smooth and orderly issuance and underwriting of the stocks on the science and technology innovation board, the SSE will set up a self-discipline committee for the public offering of the stocks on the science and technology innovation board (the “Self-discipline Committee” for short), so as to give play to the role of self-discipline of the industry and help form positive and stable expectations. The Self-discipline Committee is composed of the main participants in the stock issuance on the primary market. It performs its duties through work meetings and is responsible for providing advice on the formulation of relevant policies for the issuance of the stocks on the science and technology innovation board and proposing initiatives for stock issuance and underwriting in the industry. At the same time, the role of sponsoring institutions in participating in the strategic allotment is brought into play, and sponsoring institutions are urged to prudently conduct businesses so as to form the market constraints on the size and pace of new share issuance.
Q4: Listing and delisting are the “entrance” and “exit” of the market of the science and technology innovation board for the enterprises, which are directly related to the positioning and the future ecology of the market of the science and technology innovation board. What are the provisions of the “Listing Rules” on the listing conditions and delisting requirements for the stocks?
A: Based on the market positioning of the science and technology innovation board, the "Listing Rules" provides targeted rules for the listing and delisting of stocks on the board. The basic purpose is to formulate more inclusive listing conditions, and strictly implement the delisting system to smooth the “entrance” and “exit” of the market.
First of all, the listing conditions focus on the “inclusiveness”. Science and technology innovation enterprises have their own growth paths and development rules. In terms of the financial performance, a large number of enterprises are characterized by the mismatched investment and income during the early research and development period, as some enterprises have temporary losses, and some companies have not generated incomes in this early stage. The corporate governance is more dependent on human capital, with special modes existing such as the weighted voting rights and the VIE framework. Therefore, it is necessary to build a more scientific and reasonable system of listing indicators to meet the listing demand of the science and technology innovation enterprises in different types and models, at different stages of development, and with different financial characteristics, which already have the relevant core technologies and are highly recognized in the market.
Based on the above-mentioned considerations, the institutional design of the “Listing Rules” has greatly improved the inclusiveness and adaptability of the listing conditions. In terms of market and financial conditions, with the introduction of the “market value” indicator, combined with the financial indicators such as income, cash flow, net profit and R&D investment, 5 sets of differentiated listing indicators have been established, and can meet the listing demand of all kinds of science and technology innovation enterprises that have made breakthroughs in the core technology or achieved partial results through the continuous R&D investments in key areas, have good development prospects, but show different situations in financial performance. The enterprises that have unresolved losses or are still unprofitable are allowed to go public, and the proportions of intangible assets are no longer limited. In terms of non-financial conditions, the enterprises with special governance structures such as weighted voting rights are allowed to be listed, with necessary constraints of norms imposed. In the implementation of relevant standards for issuance and listing, the characteristics and reasonable demands of the science and technology innovation enterprises will also be taken into account. For example, in order to meet the demands of the science and technology innovation enterprises for attracting talents and maintaining the stability of the management and the core technical team, the companies are allowed to have the option incentives and employee stock ownership plans that were made before the IPO and will be implemented after the listing; with the science and technology innovation enterprises characterized by the frequent changes to the equity structure and business integration, the time limits are relaxed for the shifts of actual controllers, the changes in the main business, and significant transformations of directors and executives.
Secondly, the “strictness” is emphasized in implementing the delisting criteria. The design of the delisting system of the science and technology innovation board has fully absorbed the existing practices in delisting, and provides strict criteria in the three aspects of criteria, procedures and implementation. First, the criteria are stricter. In the case of compulsory delisting for major violations, the latest reform results for the delisting system were absorbed, and the delisting situations for major violations such as those for information disclosure and public security are clearly defined; in terms of the delisting for the market indicators, the four delisting criteria including trading volume, stock price, number of shareholders and market value are set, with the system of indicators enriched and improved; regarding the financial indicators, quantitative requirements are made on the basis of the qualitative ones, so as to describe in multiple dimensions the basic characteristics of the enterprises with “hollowed” main business that have lost their ability to sustain operations, with the single delisting indicator of continuous loss no longer used. In respect of other compliance indicators, on the basis of retaining the existing delisting indicators such as failing to disclose financial reports on time and having the audit reports with no opinions or negative opinions issued, the delisting indicators for compliance such as major defects in information disclosure or standard operation are added. Second, the procedures are stricter. The delisting process has been simplified, as with the processes of trading suspension and resumption cancelled, the companies that should be delisted will have the listing terminated directly, so as to avoid the long-term detention of the enterprises with major violations or “hollowed” main business in the market, which is likely to disrupt market expectations and the pricing mechanism. The delisting time has been compressed, as for the companies triggering the financial delisting indicators, the risk warning for delisting will be imposed in the first year, and they will be directly delisted if still reaching the indicators in the second year. No re-listing process will be specially set up. If the delisted enterprises meet the requirements for the listing on the science and technology innovation board, they can submit the application and accept the appraisal according to the procedures and requirements for registration of the stock issuance and listing. However, the companies with compulsory delisting for major violations cannot submit new application for issuance and listing and shall permanently withdraw from the market. Third, the implementation is stricter. A noticeable problem in the implementation of the current delisting system is that a small number of companies with “hollowed” main business put a gloss on the financial data and evaded delisting indicators by implementing transactions with no commercial substance. In order to solve the “long-standing” problem, the delisting system for the science and technology innovation board specifically stipulates that if a listed company's operating income mainly comes from the trade businesses that are not related to the main business or the connected transactions with no commercial substance, and there is evidence that the company has already obviously lost the ability to continue operations, the delisting will be initiated in accordance with the prescribed conditions and procedures.
Q5: Formulating a continuous listing supervision system in line with the characteristics of the science and technology innovation enterprises is an inherent requirement for improving the quality of listed companies and promoting the construction and development of the science and technology innovation board market. What are the main institutional arrangements of the “Listing Rules” in this regard?
A: The “Listing Rules” is the main regulation governing the continuous supervision of the listed companies on the science and technology innovation board. Compared with the existing rules for stock listing, the system has been designed mainly in the following five aspects:
First of all, the information disclosure system is more targeted. On the basis of common requirements for information disclosure, the information disclosure focuses on industry information, core technologies, business risks, corporate governance, performance fluctuations, etc. in accordance with the characteristics of the science and technology innovation enterprises, and more flexible institutional arrangements have been made in the quantitative indicators of information disclosure, the disclosure time point, the disclosure mode, suspension of or exemption from disclosing commercial sensitive information, releasing major information in non-trading hours, and other aspects, so as to maintain the commercial competitiveness of the science and technology innovation enterprises.
Secondly, the shareholding lessening system is more reasonable. Highly relying on the founders and the core technical teams, the science and technology innovation enterprises have uncertainties in future development. Therefore, it is necessary to maintain the relative stability of the shareholding structure so as to ensure the sustainable development of the company. To this end, the supporting rules have made more targeted arrangements for the shareholding reduction for the science and technology innovation enterprises. First, the stability of the control right and the technical team shall be maintained. The controlling shareholders lessening the shareholding after the lift of the sales limit shall keep the control right stable and clear; the lock-up period is adequately extended for the core technical personnel, who shall not reduce their shareholding for 36 months after the listing. Second, restrictions are imposed on the shareholding lessening by the shareholders of unprofitable companies. The controlling shareholders, directors, supervisors and executives and core technical personnel (the “specific shareholders” for short) of a company that was still unprofitable at the time of listing shall not reduce the shares issued before the IPO until the company achieves profits, but the companies that have been listed for more than 5 years will not be subject to this restriction. Third, the modes of shareholding lessening are optimized. Each specific shareholder is allowed to reduce their holdings by 1% per year in the secondary market. On this basis, we plan to guide them in reducing their holdings to institutional investors through non-public transfer, with the proportion and pace no longer limited, and a 12-month lock-up period will be set for the transferred shares. Fourth, more flexible ways to reduce shareholdings are provided for other shareholders such as venture capital funds. After the expiration of the period of sales restriction on the pre-IPO shares, in addition to the implementation of the shareholding lessening based on the current rules, the non-public transfer method can also be adopted in shareholding reduction so as to facilitate the withdrawal of venture capital funds and promote the formation of the innovation capital. Fifth, the disclosure of information on shareholding lessening is intensified. On the basis of retaining the current system of pre-disclosure of information on shareholding reduction, the specific shareholders are required to disclose the company's operations before reducing the pre-IPO shares, and fully reveal the risks to the market.
Thirdly, the system of weighted voting rights is more standardized. The practice choices of science and technology innovation enterprises for corporate governance are respected, and the companies with weighted voting rights set are allowed to go public. In order to balance the interests, the “Listing Rules” provides necessary standardization for how to properly set the weighted voting rights. First, stricter preconditions are set. It is mainly stipulated that the arrangement for weighted voting rights made by the issuer must be passed by more than two-thirds of the voting rights held by the shareholders attending the general meeting, the arrangement for weighted voting rights should operate stably for at least one full fiscal year before the listing, and the issuer shall have a relatively high market value. Second, the qualifications and subsequent changes of the parties with special voting rights are restricted. It is mainly stipulated that the relevant shareholders should make significant contributions to the company's development or growth of performance, and continuously serve as directors of the company before and after the company's listing, the shares with special voting rights shall not be traded in the secondary market, the shares with special voting rights shall be permanently converted into ordinary shares once the holders are unqualified or the special voting rights are transferred, and the established proportion of special voting rights shall not be increased. Third, the legitimate rights of the shareholders with ordinary voting rights are protected. It is mainly stipulated that except for the number of voting rights, other rights enjoyed by the shareholders are the same, the voting rights of ordinary shares should reach the minimum proportion, the shareholding ratio required for convening the general meeting of shareholders and making proposals at the general meeting of shareholders and its calculation method are provided, and the exercise of special voting rights is restricted for major matters. Fourth, the internal and external supervision mechanisms are strengthened. It is mainly stipulated that the companies are required to fully disclose the implementation and changes of the arrangement for weighted voting rights, the board of supervisors shall issue the special opinions on the setting and operation of the arrangement for weighted voting rights, the abuse of special voting rights is banned.
Fourthly, the responsibility of the sponsoring institutions for continuous supervision is more stringent. Tightening the responsibility of the sponsoring institutions will provide important support for the implementation of the registration-based IPO system. The principle is implemented in the arrangements for the system of continuous supervision. First, the continuous supervision period is extended. The continuous supervision period for the initial public offering shall be the remaining time of year of the listing plus the next three full fiscal years. If a listed company implements refinancing or major asset reorganization through the issuance of shares, the sponsoring institution or financial adviser providing the service shall perform the continuous supervision duties in the remaining period. Second, the responsibilities for the supervision and information disclosure for the major irregularities of the listed companies are refined. The sponsoring institutions are required to pay attention to the daily operations and stock transactions of the listed companies, urge the companies to disclose major risks, issue supervisory opinions on the major risks of the company and conduct necessary on-site inspections. Third, the investment research reports shall be issued on a regular basis. The sponsoring institutions are required to regularly conduct investment research on the fundamentals, industry situation, corporate status and financial conditions for the listed company, and form and disclose the formal investment research reports on a regular basis so as to provide reference for investors' decision-making.
Fifthly, the equity incentive system is more flexible. Equity incentive is an important system for the science and technology innovation enterprises to attract, retain and motivate talents. First, the proportion upper limit and the scope of the targets of the equity incentives are expanded. The limit of all the shares of a listed company during the validity period that are involved in the equity incentive plan is increased from 10% to 20% of the total. The shareholders, actual controllers, their spouses, parents, and children who hold more than 5% of the shares of the listed company alone or in aggregate are allowed to become the targets of equity incentives, but they should be the main management personnel, core technical personnel or core business personnel in the listed company. Second, the grant prices of the restricted stocks are more flexible. The limit for the grant price of the restricted stock is removed, and the independent financial adviser is required to express professional opinions on the rationality of the pricing basis and the pricing method and whether it will harm the interests of the listed company. Third, the modes of implementing the equity incentives are more convenient. According to the current provisions, after the restricted stock plan is reviewed and approved by the shareholders' meeting, the listed company shall grant the rights and complete the registration within 60 days. In practice, some restricted shares granted by the listed companies needed to be repurchased and written off because of failing to fulfill the exercise conditions. The “Listing Rules” cancels the restriction and allows the listed company to re-register the restricted shares under the names of the incentive targets after the incentive conditions are met. After the actually granted equities are registered, the period of sales limit can no longer be set, which facilitates the implementation and operation.
In addition, a more market-oriented M&A and reorganization system is also stipulated. The registration-based IPO system shall be implemented if the M&A and reorganization on the science and technology innovation board involves the issuance of stocks. With the M&A and reorganization reported to the CSRC for registration after being reviewed and approved by the SSE, the implementation process is more efficient and convenient. At the same time, it is required that the M&A and reorganization of the companies listed on the science and technology innovation board should focus on the main business in implementation, the underlying assets should have synergistic effects with the main business of the listed company, and “hyping shell” and “selling shell” through M&A and reorganization should be strictly banned.
Q6: The SSE has formulated special rules for the trading on the science and technology innovation board. Can you brief us on the special arrangements?
A: In order to prevent and control excessive speculation, guarantee the market liquidity, and accumulate experience for the reform of the trading mechanism of the main board, the “Special Provisions on Trading” has made differentiated arrangements for the trading system of the science and technology innovation board according to the characteristics of the science and technology innovation enterprises, mainly in the following six aspects:
First of all, the investor suitability system is introduced. With the science and technology innovation enterprises characterized by new business models, potential significant fluctuations in performance and high business risks, the investors are supposed to have corresponding experience in investment, financial strength, risk tolerance and ability of value judgment. Therefore, individual investors participating in the stock trading on the science and technology innovation board are required to have at least RMB500,000 of assets in the securities account and the fund account as well as at least 24 months of experience in securities trading. The investors who do not meet the suitability requirements can participate in the science and technology innovation board by purchasing public funds and other means.
Secondly, the price limit is appropriately relaxed. The science and technology innovation enterprises have the inherent characteristics of large investment and fast iteration, and the stock price is prone to significant fluctuations. To this end, on the basis of summing up the advantages and disadvantages in the implementation of the current price limit system in stock trading, the price limit for the stocks on the science and technology innovation board will be relaxed to 20%. In addition, in order to form reasonable prices as soon as possible, the price limit will not be implemented in the first 5 trading days after the listing of the stocks.
Thirdly, the after close fixed-price trading is introduced. The after close fixed-price trading refers to the trading mode in which investors trade stocks at the closing price using closing limit orders after the closing auction. The after close fixed-price trading is an effective supplement to the continuous trading in the trading hours, which can meet investors’ demand for fixed prices trading after close, and also help to reduce the price impact of the large-volume transactions passively tracking the closing prices during the trading hours.
Fourthly, the trading mechanism of securities lending and borrowing is optimized. In order to improve the efficiency of market-based pricing and improve the "unilateral market" and other issues, the trading mechanism of securities lending and borrowing of the science and technology innovation board will be enhanced, starting on the first trading day after the listing, the stocks on the science and technology innovation board can be used as the underlying assets for the securities lending and borrowing, and the criteria for selecting the underlying securities of securities lending will be different from those for the A shares on the main board.
Fifthly, the micro mechanisms and arrangements are adjusted and optimized. The requirement for the volume of a single order is adjusted, as the volume of a single order is no longer required to be 100 shares and its integral multiple, and the volume of a single market order or limit order should be no less than 200 shares, which can be incremented by 1 share. The maximum volume of a single market order is 50,000 shares, and that of a single limit order is 100,000 shares. In addition, according to the market conditions, based on the different levels at which the stock prices are, different tick sizes for the orders will be implemented, so as to reduce the bid-ask spread of low-priced stocks and improve market liquidity. According to market conditions, it is possible to make separate provisions on the range of effective order prices and the conditions for the temporary trading suspension during the business hours, so as to prevent excessive speculation and maintain normal trading order.
Sixthly, the supervision of trading behaviors is intensified. In order to avoid the significant impact of the large-volume orders on the secondary stock trading market, the principles of prudent trading and decentralized trading have been established; the responsibility of members for managing abnormal trading behaviors of the clients has been enhanced.
After the launch of the science and technology innovation board, the SSE will, under the guidance of the CSRC, assess the implementation of the above-mentioned differentiated trading mechanism in a timely manner. On this basis, the systems for the market maker business, the securities lending and borrowing business of securities companies and other businesses will be steadily introduced as needed, and the stock trading mechanism of the science and technology innovation board will be further adjusted and optimized.
Q7. Under the pilot registration-based IPO system, the SSE will assume the responsibility for reviewing the issuance and listing of stocks. What basic ideas have been adhered to in the institutional arrangements for the review of issuance and listing?
A: Under the pilot registration-based IPO system, in the design of the system for the review of issuance and listing, it is necessary for the SSE to not only adhere to the market orientation, but also give full play to the role of the market mechanism, and vigorously carry out institutional innovation; it is also imperative to stick to steady start and orderly advancement on the basis of the actual conditions of the capital market. The general ideas are as follows.
First of all, we will adhere to the focus on information disclosure. Under the registration-based IPO system, the review of the issuance and listing shall, on the basis of paying attention to the relevant conditions for issuance and listing, focus on information disclosure, further strengthen the regulation of information disclosure, and attach more importance to the quality of information disclosure, so as to effectively protect the rights and interests of investors. Based on the demands of the investors, the SSE will conduct reviews and inquiries from the perspective of the adequacy, consistency and comprehensibility of the information disclosure, and urge the issuers, their sponsors, and securities service agencies to disclose information in an authentic, accurate and complete manner. Such a review procedure is an interactive process of asking questions, answering questions, and continuously enriching and improving the contents of information disclosure; it is also a regulation process that deters fraudulent issuance and facilitates investors to make investment decisions with sufficient information.
Secondly, we will make the review more open and transparent. To effectively fulfill the responsibility for review of issuance and listing, the exchange should further improve open supervision. The “Review Rules” focuses on enhancing the unification and openness of the review standards and strengthening the credibility of the review; the whole-process electronic review will be implemented, the review mechanisms and processes will be optimized, and the review progress schedule including the key nodes such as acceptance, review progress and listing committee meetings will be announced publicly, so as to improve the certainty of the review results. We will promptly disclose the exchange's review inquiries and the replies of the issuer, sponsor and securities service agencies, increase the publicity in the review process, and accept social supervision. We will set definite time limits for the reviews to stabilize market expectations.
Thirdly, we will tighten the responsibilities of the intermediaries. Whether the sponsors and the securities service agencies can perform their duties diligently is an important basis for the smooth implementation of the pilot registration-based IPO system. In terms of the responsibility for information disclosure, we stress more that the issuer is the first person responsible for information disclosure, and the sponsor and the securities service agencies shall strictly check the information disclosure of the issuer. The "Review Rules" stipulates that the sponsors shall simultaneously deposit the working papers at the time of application, initiate on-site inspections as needed during the review, and give "cold treatment" in the aftermath supervision, and urges the sponsors and securities service agencies to fulfill the responsibilities for due diligence and prudent verification, so as to give better play to the role of sponsors and securities service agencies as “gatekeepers”.
Fourthly, we will strengthen the whole-process supervision before, during and after the event. Based on the national condition and market condition that China is an “emerging and transforming” capital market, we will give full play to the role of market supervision and strengthen the whole-process supervision before, during and after the event. If there are cases of failing to meet the basic requirements for issuance and listing, we will exercise the veto according to the laws and rules, so as to improve the quality of listed companies at the source. If an exception is found during the review, we will carry out necessary verifications or inspections; if there is any false record, misleading statement or major omission in the documents of application for listing, the review will be terminated; if there are suspected violations, we will report to the CSRC for investigation and prosecution.
Q8: In the pilot registration-based IPO system, the SSE will review the disclosure of the information about the issuance and listing in terms of adequacy, consistency and comprehensibility. What is the relationship between the principle and the basic requirement that the disclosed information shall be authentic, accurate and complete?
A: Under the pilot registration-based IPO system, the issuer should guarantee the authenticity, accuracy and completeness of the information disclosure (the “three old standards” for short), and the sponsor and the securities service agencies shall bear the responsibility for supervising the information disclosure of the issuer. In accordance with the “Review Rules”, the SSE will conduct an information disclosure review on the application documents for issuance and listing from the perspective of adequacy, consistency and comprehensibility (the “three new standards” for short), so as to urge the issuers, their sponsors and securities service agencies to disclose the information in an authentic, accurate and complete manner, and to improve the quality of information disclosure. The relationship between the "three new standards" and the "three old standards" can be understood in the following two aspects.
On the one hand, the “three old standards” are the basic requirements for the disclosure of the information on issuance and listing. The issuers shall guarantee the “three old standards”, and the sponsors and securities service agencies shall bear the responsibility for supervision. As the first person responsible for information disclosure, the issuer shall ensure the authenticity, accuracy and completeness for the information disclosure, and fully disclose the important information that will influence the investors’ investment decisions; bearing the responsibilities of “gatekeeper”, the sponsor shall, on the basis of the business rules and the self-regulation norms in the industry formulated according to law, carry out comprehensive verification of the application documents for issuance and listing, so as to ensure that the information disclosed in the documents is authentic, accurate and complete. The effective implementation of the issuer’s responsibility for credibility and the intermediary’s responsibility for supervision is an important goal for the regulation of issuance of listing, and the direction for the reform of the pilot registration-based IPO system.
On the other hand, the relationship between the “three new standards” and the “three old standards” is that between mode and purpose, means and result. The SSE will improve the “three old standards” through the reviews for the “three new standards”. In the review of issuance and listing, the SSE will focus on information disclosure, and carry out reviews and inquiries of information disclosure from the perspective of the investors based on the “three new standards”. The basic goal is to urge the issuer to earnestly perform the duties of the first person responsible for information disclosure through reviewing and inquiring, to push sponsors and securities service agencies to effectively fulfill the responsibility for supervision of information disclosure, to form a deterrent to relevant obligors for information disclosure so as to reduce or avoid the cases of fraudulent issuance, and to improve the quality of information disclosure so that the investors can make investment decisions with sufficient information.
The reviews for adequacy will focus on whether the contents disclosed in the documents of listing application contain the information that has a significant impact on investors' investment decisions, and whether the extent of the disclosure reaches the level necessary for investors to make investment decisions. The review includes, but is not limited to, whether the information about the issuer in business, technology, finance, corporate governance, investor protection and other aspects, the situation of the issuance and the impact of the issuance on the issuer are disclosed adequately and fully, and whether all the factors that are likely to have a significant adverse effect on the issuer’s operations and financial conditions are fully disclosed.
The reviews for consistency will focus on whether the contents of the documents of listing application are consistent and intrinsically logical. The review includes, but is not limited to, whether there is a reasonable articulation in the financial data, whether there is any contradiction in non-financial information, whether financial information and non-financial information can be mutually verified, and whether there is a reasonable explanation for the significant differences from the companies in the same industry.
The reviews for comprehensibility will focus on whether the contents disclosed in the documents of listing application are concise and understandable, and whether the contents are convenient for ordinary investors to read and understand. The review includes, but is not limited to, whether the contents are in plain language, focused and logically clear, whether the information disclosure is targeted on the basis of the company’s own characteristics, and whether the disclosure is made in an intuitive, accurate and easy-to-understand manner.
Q9: In launching the science and technology innovation board and the pilot registration-based IPO system, the Listing Committee of Science and Technology Innovation Board and the Advisory Committee of Science and Technology Innovation will be set up. Can you brief us on their responsibilities and functions?
A: In launching the science and technology innovation board and the pilot registration-based IPO system, the Listing Committee of Science and Technology Innovation Board (the “Listing Committee” for short) and the Advisory Committee of Science and Technology Innovation (the “Advisory Committee “ for short) will be set up.
The Listing Committee is set up to ensure the openness, fairness and impartiality in the pilot review work, and make the reviews more professional, authoritative and credible. During the process of the pilot program, the responsibility for review of issuance and listing at the SSE level will be beared by the SSE’s Issuance and Listing Review Agency (the “Review Agency” for short) and the Listing Committee. The Review Agency assumes the main responsibility for review and provides clear review opinions. The Listing Committee focuses on deliberating on the review reports submitted by the SSE’s Review Agency through review meetings and other forms, bringing the functions of supervision, check and balance into play. The “Measures for the Administration of the Listing Committee” provides for the operating mechanism of the Listing Committee. First, in terms of member structure, professionalism and independence are highlighted. The Listing Committee is composed of 30 to 40 members including the experts from outside the SSE and the relevant specialized personnel at the SSE, who are mainly accounting and legal professionals, market participants and regulators. Second, in terms of job responsibility, supervision and check are prominent. The review meetings of the Listing Committee will deliberate on the review reports submitted by the Review Agency and the application documents for listing and issuance, and the participating members will express their opinions on the contents of the review report and the preliminary advice of the Review Agency on whether they agree to the issuance and listing, forming deliberation opinions after comprehensive and adequate discussions. Third, in terms of working procedures, fairness and diligence are emphasized. In accordance with the principles of openness and impartiality, the relevant systems of the Listing Committee make comprehensive and meticulous arrangements for the selection and employment of members, the selection of the members attending the meetings, the notice on the meeting, the requirement for avoidance, the deliberation mechanism, and the supervision of deliberation, etc., so as to ensure that the Listing Committee performs its duties effectively.
The Advisory Committee is mainly designed to provide professional opinions and policy advice , aiming to advance the construction and the institutional design for the science and technology innovation board. Science and technology innovation enterprises are at the forefront of science and technology, highly specialized, and characterized by rapid updates, iterations, developments and changes. In order to better accurately grasp the industry characteristics of science and technology innovation enterprises, the Advisory Committee will provide professional opinions according to the needs of the SSE in listing promotion and review for issuance and listing. The “Working Rules of the Advisory Committee” provides for the operational mechanism of the Advisory Committee. First, in terms of member structure, professionalism and representativeness are highlighted. The Advisory Committee consists of 40 to 60 authoritative experts, well-known entrepreneurs and senior investment experts engaged in the science and technology innovation industry, and they are divided into several advisory groups according to the industry. The members of the Advisory Committee shall be selected and appointed by the SSE, which may request relevant ministries and commissions, institutions and relevant research institutes and industry associations to recommend members. Second, in terms of job responsibility, the committee is positioned as an expert advisory body focusing on providing professional opinions and suggestions. The committee will provide advisory opinions on whether a company has the attribute of science and technology innovation enterprises and whether it is in line with the trend of technological development in accordance with the needs of the SSE during the efforts in listing promotion. In the work related to the review for issuance and listing, the committee will provide opinions and suggestions on the review inquiries about the professional and technical questions related to the status quo of the industry, the technical level and the development prospects disclosed by the issuer. Third, in terms of duty-perform manner, appropriate flexibility shall be maintained. The SSE will consult the committee members in relevant industries on specific consultation matters through meetings, written letters and other means.
