Q&A On Shanghai Stock Exchange’s Regulation On Industry Information Disclosure Of Listed Companies

After nearly one year’s preparation in business, personnel and technical system, the Shanghai Stock Exchange (SSE) will officially adjust on January 5, 2015 the existing regulatory mode on listed companies’ information disclosure, which will transform from the jurisdiction-featured regulation to the industry regulation. This is another major move by the SSE to follow the trend and requirement of regulatory transformation and to promote the self-regulatory system innovation after releasing direct channel for information disclosure in 2013. An official of the SSE answered related questions raised by reporters.

I. Please give a brief introduction of the SSE’s major concerns of adopting the regulatory model of industry information disclosure.

Our securities regulatory system always attaches importance to the selection and improvement of the regulation on information disclosure, and regards it as the fundamental part of performing the regulatory duty of “2 maintenances and 1 promotion” (the maintenance of the open, fair, and just market order, and that of the legal rights and interests of investors, especially small and medium-sized investors, as well as the promotion of the sound growth of the capital market) and better building a market with “Justice, Fairness, and Openness”.

Jurisdiction-featured regulatory model was adopted prior to this adjustment. In this model, regulators are arranged for according to different jurisdictions where listed companies are located to perform their regulatory duties. It has been operated for nearly 2 decades, and it has played a positive role in such aspects as learning the general situations of listed companies within specific jurisdiction, urging listed companies to perform the obligation of information disclosure, realizing immediate coordination with the regional offices of the China Securities Regulatory Commission (CSRC), and forming joint force in regulation.

Since 2014, the CSRC regulatory department for listed companies conceived a gradual transformation from the jurisdiction-featured regulatory model to the regulatory model of industry information disclosure according to the general deployment of regulatory transformation and actual demands of investors. Local branches of the CSRC also developed specific measures for the industry regulation model on the basis of their actual conditions, and these measures have been partially adopted in their daily regulation of information disclosure. All these trials and efforts have accumulated experiences and provided references for the SSE’s adjustment to its regulatory model.

For the SSE, the transformation from the current regulatory model to the industry regulation model is based on the following 4 aspects:

First, to better fulfill self-regulatory duty. According to the “Securities Law” and the “Measures on Administration of Information Disclosure of Listed Companies” of the CSRC and other regulations, stock exchanges should monitor the information disclosure of listed companies and other obligors for information disclosure to ensure authenticity, accuracy, completeness, timeliness, and impartiality. In the meantime, the regulatory focus of the capital market will move down in the backdrop of the ongoing market-oriented reform, and exchanges will become the increasingly important links in the capital market regulatory system, which requires exchanges to fulfill their duty of self-regulation.

Comparatively speaking, the regulatory model of industry information disclosure is based on investors’ demands, which is more reasonable, professional and efficient. We should take this opportunity to adjust regulatory concept, optimize regulatory mechanism, innovate regulatory method, and improve regulatory efficiency. All these efforts are to better fulfill the duty of self-regulation in the “Securities Law” and serve and respond to investors’ demands.

Second, to better cope with new requirements for information disclosure in regulatory transformation. Year 2014 is the securities regulatory system’s first year to promote the regulatory transformation. A series of important documents about the reform and development of the capital market, including the “Opinions of the General Office of the State Council on Further Strengthening the Protection of Small and Medium-sized Investors” and the “Some Opinions of the State Council on Further Propelling Sound Growth of the Capital Market”, were released by the State Council, which specified that listed companies should be urged to enhance the effectiveness and pertinence of their information disclosure to meet investors’ demands, and this should be a key task in improving the quality of listed companies in the future.

Xiao Gang, Chairman of the CSRC, required at the national securities and futures regulation meeting held in early 2014 that a regulatory concept with information disclosure as the core should be established to fully promote the regulatory transformation, investors’ need should be treated as the orientation to let information disclosure better serve investors rather than serve the needs of regulation itself.

The new thoughts and requirements of information disclosure meet the rules and demands of the capital market’s long-term growth. It could provide solutions to mostly complained issues and chronic problems in the capital market. In the meantime, the CSRC hopes that stock exchanges could fully take charge of frontline regulation on information disclosure related to listed companies’ periodical reports, temporary announcements and others, build authoritative regulation on information disclosure, and cement self-disciplinary management. This requires pertinent adjustment to the model, concept and methods of self-regulation to further improve regulation of information disclosure.

Third, to better suit the new changes brought by the adoption of the direct channel for information disclosure. Since the launch of the SSE direct channel for information disclosure in July 2013, it has been operated steadily for more than 1 year. All the listed companies have been incorporated in the scope of direct channel. From the perspective of direct disclosure categories, besides a small number of announcements such as trading suspension and resumption and ex-right and ex-dividend that must adopt preliminary processing to ensure simultaneous operation with related information disclosure, 85% of announcements of the SSE market could now realize direct disclosure. We see obvious enhancement of the sense of duty of listed companies in information disclosure and of the market efficiency of information disclosure. To match with direct disclosure, the work flow of the SSE regulatory department for listed companies is also optimized and more efficient. Examiners could now learn the sensitive information for stock price and other general information at the same time with investors after the day’s trading was closed, and aftermath examination would be adopted. The SSE’s role and focus in information disclosure regulation has shifted from prior examination to in-process and aftermath regulation. All these changes have created ideal prerequisites for the SSE’s further adjustment to the existing regulatory model.

In the meantime, the internal energy of the capital market has been fully activated under the backdrop of the CSRC’s promotion of market-oriented reform. Various innovations keep emerging, which presents more complicated environment and forms for regulation on information disclosure, and aftermath regulation would be tougher. From the perspective of investors’ information demands, it has become realistic challenge for the SSE’s self-regulation to discover abnormal situations as soon as possible, handle hot issues in time, toughen the law enforcement on rule-breaking behaviors, and increase the effectiveness and pertinence of information disclosure. Therefore, to further improve the accuracy and depth of regulation on information disclosure is not only the external requirements raised by the market and investors, but also an intrinsic option for the SSE to perform its regulatory duty and establish its authority as a regulatory body after the launch of the direct channel for information disclosure.

Fourth, to better serve the development of the SSE’s blue chip market. Currently, there are nearly 1,000 companies listed in the SSE. While its market size is expanding, the industries of listed companies are also all the more complete. The fundamental and pillar industries such as finance, real estate, mining, and transportation have gained steady growth, and the number of listed companies from emerging industries such as culture, information communication, high-end equipment manufacturing, and internet also increased. The industry structure and size of listed companies have undergone great changes. The SSE’s blue chip market has formed a pattern of “one exchange’s market covering various industries”.

In the meantime, with the SSE’s enhanced inclusion and ability of serving the real economy, the information disclosure rules mainly based on traditional listed manufacturing companies have become difficult to meet the differentiated disclosure needs of listed companies from different industries in such aspects as business model, valuation basis, profits and competitive edge. From the perspective of industry, it has become the market’s expectation that listed companies could disclose more information related to investment decisions to accurately reveal their investment value. Therefore, the market foundation for industry regulation has formed, and it is the right time for adopting the industry information disclosure.

II. What are the changes of and adjustments to the SSE’s regulatory concepts for listed companies’ information disclosure in this new regulatory model?

After adopting the regulatory model of industry information disclosure, the SSE will take industries of listed companies as regulatory basis and the arrangement of regulators will depend on whether listed companies are in the same industry or similar industries. While optimizing regulatory formation, the SSE will also change and adjust its regulatory concept, which will involve the following 4 aspects:

First, it will further transform from prior regulation to in-process and aftermath regulation. The general regulatory model of information disclosure adopted by the SSE for listed companies was “nanny style” regulation before the launch of direct channel for information disclosure, which led to various problems such as vague duties on information disclosure, lack of intrinsic motivation for the improvement of information disclosure among listed companies, insufficient demonstration of companies’ investment value according to disclosed information. Meanwhile, the regulation focused on compliance and thus the demonstration of listed companies’ investment value and effectiveness remained insufficient.

After the adoption of the regulatory model of industry information disclosure, the SSE will spare no efforts to transform into a “doctor style” regulation which will be problem-oriented on the basis of the direct channel for information disclosure which has been adopted for more than 1 year, and further enhance the sense of first responsible persons for information disclosure among listed companies and other market bodies, and adjust the SSE’s regulatory focus to in-process and aftermath regulation. We will make use of relative advantages of industry regulation to exert the “diagnosis” function of this “doctor style” regulation to more effectively guide, encourage and urge listed companies to reveal risks and value factors that are common in their industries as well as unique to themselves by comparing with different listed companies in the same industry, and to help investors to gain more pertinent information for investment decisions.

Second, it will further unify regulatory standard for information disclosure. The unification of regulatory standard is one of the tough issues in regulation on listed companies. After the launch of Shanghai-Hong Kong Stock Connect, the channel for the SSE to go global was opened and thus there is an urgent need for unified regulatory standard. In the jurisdiction-featured regulatory model, as listed companies tend to bear obvious differences and unique features, the adoption of a unified regulatory standard could be too rigid as well as difficult. The regulatory standard summarized on the basis of jurisdiction tends to be individual, loose and unsystematic, and it could not meet the demand for a more open, impartial, and fair environment after the transformation. The regulatory model of industry information disclosure will be helpful to solve problems mentioned above. We should proceed from similar industry models to enhance feasibility and reasonability of unification of regulatory standard through industry information disclosure guidance and sample of benchmarking companies.

Third, it will further enhance the openness of self-regulation and the sense and ability of quick reaction. The capital market is an information cluster and information disclosure is the foundation for reasonable allocation of resources and smooth trading. The emerging of internet and we-media has enabled real-time and diversified information spread and the negative effects of illegal behaviors in information disclosure tend to have a greater impact and will cause more serious damages to the interests of investors. Meanwhile, various new situations and problems tend to emerge and the possibility of illegal behaviors could also increase with the progress of the market-oriented reform and decreasing of prior control.

Facing this market environment and regulatory situation, we need to communicate our regulatory stance through transparent regulation to effectively stabilize the market sentiment so as to positively respond to various hot issues and emergencies and try our best to prevent the prevailing of negative conditions. The adoption of the regulatory model of industry information disclosure will enable exchanges to enhance the transparency of regulatory process and standard with a unified regulatory standard. Meanwhile, exchanges could enhance their ability to discover problems and to make effective judgments to potential risks, so as to spot, respond, announce and resolve in time.

Fourth, it will enhance listed companies’ efficiency in self-regulation. In jurisdiction-featured regulatory model, one regulator would need to handle companies in different industries and types within one jurisdiction, and the regulation would generally be fundamental, scattered, and extensive. In the regulatory model of industry information disclosure, exchanges could gather companies in the same industry and allocate regulatory forces on this basis, and thus they could compare with, analyze, and judge the common places and differences of similar companies in terms of operation, business and corporate finance to enhance the accuracy and depth of information disclosure regulation. On this basis, exchanges could improve their efficiencies in information disclosure regulation through information disclosure examination to reveal risks in business and operation of specific listed companies.

Meanwhile, the categorized regulation on companies in the same industry could also help regulators to enhance their understandings of the industry circle, organization structure, operation model, process flow, and financial features, and this would help regulators to accumulate regulatory experiences and industry knowledge to develop habits of active thinking and in-depth research, offering more possibilities to the overall improvement of regulators’ expertise and professional ability.

III. How does the SSE categorize different industries in the regulatory model of industry information disclosure?

There are 995 companies listed in the SSE by December 31, 2014. According to the CSRC’s industry categorization, these companies involve 18 first-tier industries. Considering the great number and different features of manufacturing companies, we have also taken into consideration 26 second-tier industries. Therefore, there are a total of 43 industries. We have developed, on this basis, the categorization standard of “emphasizing key industries, integrating related industries and appropriately taking into account of special industries”.

First, we have taken into consideration of such factors as proportions in national economy, number of peer companies, and the portion of market capitalization of the SSE market to conduct key regulations on key industries. 11 industries including real estate, equipment manufacturing, pharmacy, chemical, transportation, mining, finance, retail, information communication, agriculture and forestry, and utilities were selected for key regulation. In addition, integrated classified regulation will be adopted for ST companies and B-share companies which bear certain particularities in such aspects as information disclosure, daily regulation, and business operation, so as to cement risk control.

Second, we will integrate similar industries, pair between any two industries according to correlations among key industries, and adopt joint regulation. For instance, real estate industry is a typical capital-intensive industry, bearing strong dependency to the financial industry; over 20% of loans of commercial banks have been invested in the real estate industry; meanwhile, real estate is also an important financial collateral. Therefore, a joint regulation over the two industries could contribute to effectively identifying potential risks through comparison and mutual corroboration.

Third, we will adopt necessary combinations to industries other than key industries according to their correlations with key industries. For example, the building industry tends to bear similar features and operation model with the real estate industry, while the furniture manufacturing and wood processing industries are typical industries driven by the real estate industry. Therefore, the three industries should be incorporated into one regulatory group of industry information disclosure.

In the future, the SSE will adopt dynamic adjustments to the current industry categorization according to actual conditions of industry development and changes among companies listed on the SSE.

IV. After the adoption of the regulatory model of industry information disclosure, what are the SSE’s arrangements in terms of realizing regulatory cooperation with the CSRC’s regional offices to form joint regulatory forces?

In previous self-regulation of information disclosure, the effective guidance of the CSRC and supports of local CSRC branches have become important guarantees for the SSE to perform self-regulation. Objectively speaking, the adoption of the new regulatory model will bring some changes to the SSE’s cooperation with local CSRC branches, but the strength and effect of the joint regulation could only be enhanced but not be reduced. Therefore, we have developed pertinent arrangements according to the key points and tough points of the regulatory cooperation of industry information disclosure by insisting on previously effective mechanisms and experiences.

First, establish a platform to share information with the CSRC’s regional offices. We have further improved functions of “CSRC Zone” on our extranet and develop it into a platform to enhance the communication between the exchange and the CSRC by directly pushing various information such as regulatory news, regulatory documents, comments on separation system, company announcements, credit archives, laws and regulations, research and data. Now, regulators of listed companies from the CSRC’s regional offices could log onto this platform to get real-time information.

Second, establish relatively stable communication mechanism. Now, we have completed 36 contact lists of the SSE regulators, including their names, telephones, e-mails, industry groups and information on industries they take charge of, and these lists have been sent to each regional office of the CSRC. We also developed contact lists of local CSRC branches after receiving contact information of their responsible personnel to ensure joint regulation would be duly assigned. Besides, we have further improved the level of contact persons for key cases, and the responsible person of the SSE’s listed company regulation department will be responsible for the regulatory coordination with the CSRC’s regional offices and develop work mechanism for responsible personnel’s connection. Meanwhile, departments’ responsible persons and responsible personnel for companies will also be listed in regulatory coordination documents which will be sent to the CSRC’s regional offices to facilitate contacts.

Third, master the general conditions of listed companies in all jurisdictions. After the adoption of the regulatory model of industry information disclosure, understanding of general conditions of listed companies in all jurisdictions will remain to be the key part of the SSE’s company regulation.

We will assign specific personnel to carry out regular summary of the general conditions of listed companies on the basis of 36 jurisdictions after the release of annual and semi-annual reports and develop brief reports. Specific personnel will be arranged to summarize conditions of risky companies discovered in daily regulations at the end of each quarter and communicate with the CSRC’s regional offices to track and learn the risk information and report to responsible personnel in the SSE.

V. After the adoption of the regulatory model of industry information disclosure, what are the changes that should be made in the information disclosure of listed companies?

After the adoption of the regulatory model of industry information disclosure, the target of related information disclosure regulation will attach more importance to effectiveness, pertinence, simplicity and comparability on the basis of trueness, accuracy, completeness and timeliness. Therefore, companies listed on the SSE should also adapt to the change of the regulatory model to realize simultaneous adjustment to their information disclosure concept, content and methods.

First, we should transfer from being compliance-oriented to focusing on both compliance and effectiveness. Currently, the information disclosure of listed companies mainly focuses on whether they could meet the requirements of regulatory departments, bearing obvious inclination to compliance. This leads to misplacement of the service object of information disclosure to some extent. To have information disclosure become the core, the information disclosure should not be limited to compliance in the form. We should enable the information disclosed to reveal companies’ investment value and to become effective information for investors.

Therefore, listed companies, apart from meeting regulatory requirements, should pay more attention to meet investors’ demands for information and start from their industry features to disclose more industry information that could help investors to make investment decisions after the adoption of the regulatory model of industry information disclosure.

Second, we should transform from being completeness-oriented to focusing on both completeness and simplicity. After over 20-year development, we have developed a full-fledged information disclosure system of listed companies and the information disclosed by listed companies is also relatively complete. However, the information disclosed by certain listed companies tends to be redundant and difficult to understand, and investors could not understand the key information. For example, many investors complained that the annual report has become increasingly complex. It tends to include almost all information, which is difficult for investors to find key points; moreover, the casual use of jargons and lack of explanation to industry terminologies could mislead investors.

Therefore, listed companies should pay more attention to make the information concise and easy-to-understand on the basis of comprehensive information disclosure, trying to explain to investors the complex industry knowledge and financial information through simple words.

Third, we should transform from legality-oriented to focusing on both legality and voluntariness. Currently, listed companies disclose their information in accordance with various laws and regulations on information disclosure released by the CSRC and exchanges. However, the rule system for information disclosure tends to be general and normal and thus could not fully reveal investment value of specific listed companies and specific industries. Take the retail industry for example, many key indicators such as shop numbers, number of employees, sales volume per square meter, and rent per square meter are not included in the scope of statutory information disclosure. Pharmaceutical companies are also unwilling to give a detailed disclosure of such key information as R&D investment, project progress, which could reveal the companies’ investment value.

Therefore, listed companies should, on the basis of obeying general information disclosure requirement, improve the individuality of their information disclosure and focus on the collection and organization of industry information and reveal more information that could be helpful to show their investment value and potential risks.

In addition, listed companies, after the adoption of the new regulatory model, should continue to obey various requirements of information disclosure and strengthen their sense of duty, and cooperate with the SSE’s industry regulation transformation. We will also encourage listed companies to raise their opinions and suggestions on such issues as work mechanism, industry categorization and information disclosure standards so as to jointly improve the implementation and regulation of industry information disclosure.

VI. What preparations has the SSE made for the regulatory model of industry information disclosure? What are the detailed work arrangements recently?

The adoption of the regulatory model of industry information disclosure is the SSE’s another major transformation on information disclosure self-regulation mechanism after the launch of the direct channel for information disclosure. The SSE’s company regulation department will not only face the adjustment to regulatory concept and method, but also involve the transition and connection of its internal working mechanism, and this will lead to the situation of “collective rotation of employees and adjustment to companies”.

We have worked hard on the following two aspects to ensure stable transition:

First, we have properly arranged the handover of regulation on listed companies. We have further improved company profiles for each listed company and held various meetings to discuss the handover issue to ensure the successors could fully and accurately learn the histories and potential risks of companies they are to regulate. In addition, special handover files and workflows are designed for such high risk items including suspension and resumption of securities, stock listing, refinancing, M&A and reorganization, and convertible bonds that will involve information disclosure operation and business operation. We set up a one-month special guarantee period to ensure smooth handover. It should be noted that companies listed on the SSE should be responsible to investors and cautiously process various information disclosure items within this one-month special guarantee period to ensure the accuracy of various information disclosure items and operation.

Second, we will organize responsible personnel to learn their industries beforehand. Currently, the SSE’s regulation department for listed companies have basically developed various industry research database, and industry analysts from such professional institutions as CITIC Securities, Haitong Securities and Industrial Securities, as well as experts from leading listed companies, such as Bank of China, Huaneng Power, China Shenhua, SAIC Motor, and Shanghai Pharma, were invited to give more than 20 trainings to help regulators to become familiar with the basic conditions and features of these industries.

We also know that the adoption of this new regulatory model is simply a beginning of the SSE’s adjustment and transformation of regulatory model. To realize the original intention of this new regulatory model, we should continuously promote various work designs to execute related plans and measures. Recently, we are preparing to promote the following two aspects:

First, we will gradually establish complete industry information disclosure indicators and guiding system. The SSE has released information disclosure guidance for real estate, petroleum and natural gas, and coal industries. With nearly one year’s practice, the guidance has reached certain effects and won popularity among investors and market entities in improving the pertinence and effectiveness of information disclosure and meeting investors’ demand for information. Currently, the SSE is preparing information disclosure guidance for the retail industry and the power industry, and it is estimated to be put into practice in 2015. In the future, the SSE will release information disclosure guidance for other industries step by step.

Second, we will explore the 2014 industry annual report examination. After the adoption of the new regulatory model, the same group of SSE regulators will examine the annual reports of listed companies in the same industry. We have decided to enhance horizontal comparisons of financial information, business lines, and business modes of listed companies in the same industry in our 2014 annual report examination, so as to urge listed companies to disclose pertinent information that investors need and further improve the effectiveness and comparability of the information disclosure regulation. Furthermore, we will conduct key examinations on “High Risk” and “Concerned” companies discovered in previous company handover in accordance with categorized regulation principle and require companies to fully reveal major risks and adopt corresponding regulatory measures in time.

The adoption of the regulatory model of industry information disclosure is a major reform in the SSE’s information disclosure self-regulation model under the backdrop of regulatory transformation, and it is also a new trial for the SSE to actively perform its self-regulatory duty during the market-oriented reform. The reform this time will be difficult, influential and have a wide involvement. The SSE will continue to collect opinions and suggestions from investors and market entities to keep improving related work mechanisms and methods, insist on being market-oriented and practice-based to enhance effectiveness of information disclosure regulation of listed companies, safeguard the open, fair and just market order, and protect the rights and interests of investors, especially small and medium-sized investors, thus promoting the steady and healthy development of the market.