.jpg)
On 13 December, the Shenzhen Stock Exchange (SZSE) and China Securities Depository and Clearing Corporation Limited (CSD&C) jointly released the Implementation Measures for Online Subscription of IPO Shares according to Market Value on the Shenzhen Market (the “Online Offering Measures”) and the Implementation Rules for Offline Placement of IPO Shares on the Shenzhen Market (the “Offline Placement Rules”). In an interview with press, a senior officer of the SZSE answered questions regarding the two documents.
Q1: Please give a brief description of the background and application scope of the two documents.
A: Recently, the China Securities Regulatory Commission (the “CSRC”) made a massive reform of the IPO system by issuing the Opinions on Further Advancing the Reform of the IPO System (the “Reform Opinions”) and the amended Management Measures for Securities Offering and Underwriting. To implement the reform requirements, we made a thorough overhaul of our existing Online Offering Measures and Offline Placement Rules.
The Offline Placement Rules apply to offline share placement conducted through relevant platforms of SZSE and CSD&C, which covers book-building, pricing, offline subscription, placement and etc. Only investors who meet the requirements publicized by the lead underwriter can participate in offline placement.
The Online Offering Measures apply to online share subscription at the pre-determined issue price through the SZSE’s trading system. Any investor holding SZSE-listed A-shares worth no less than RMB 10,000 in market value can participate in online subscription. However, offline placement participants are prohibited from participating in online subscription of the same stock.
Q2: What amendments are made to the Offline Placement Rules?
A: Firstly, under Article 1, Section IV of the Reform Opinions, the lead underwriter is given discretion to allot new shares. As a result, we introduced a two-way selection and verification process between the lead underwriter and investors before initial book-building. However, without a justifiable reason, the lead underwriter should not refuse any investor who meets the pre-publicized requirements for participation in the book-building.
Secondly, under Article 5, Section I of the Reform Opinions, the quantity of new shares will be adjusted based on the price determined through book-building, so we added a new requirement that investors should fill out the subscription form again to submit their subscription quantities, etc. on the date of subscription.
Thirdly, the Reform Opinions imposed stricter disclosure requirements for the processes of pricing and placement, so we waived the requirement that the lead underwriter files investors’ quotations with the CSRC. Meanwhile, we extended the deadline for book-building for one day to 15: 00 on T-2 Day, which shortened the time period between the book-building deadline and the subscription date and thus improved the efficiency of share offering.
Fourthly, the Management Measures for Securities Offering and Underwriting removed the requirement that book-building participants should register with the Securities Association of China (SAC). Therefore, in the future, investors only need to complete registration on the offline placement electronic platform through the lead underwriter and update their information by themselves.
Q3: What amendments are made to the Online Offering Measures?
A: In order to fully protect the interests of mid- and small-cap investors, the Reform Opinions and the Management Measures for Securities Offering and Underwriting require that only investors holding a specified number of non-restricted shares can use funds to participate in online subscription and, moreover, there is a ceiling on the quantity that an investor can subscribe to. Therefore, the Online Offering Measures were amended as follows:
Firstly, online offering must be based on the market value already in holding. Online offering based on the market value already held means that only an investor holding free floating A-shares on the Shenzhen market worth RMB 10, 000 or more with sufficient funds can participate in online subscription for IPO shares. This combines the merits of pure share placement proportionate to the market value and subscription based upon pre-submitted funds. Specifically, it depends on the market value of the shares the investor has already held to determine whether he or she can participate in online offering and how many IPO shares he or she can subscribe to; if the investor is eligible for subscription, he or she must pre-deposit sufficient funds in the securities account before making any valid subscription.
Secondly, a ceiling is imposed on the subscription quantity. To avoid the situation where too many IPO shares are allocated to an investor with massive holdings, the quantity that an investor can subscribe to through online subscription should not exceed an upper limit specified by the lead underwriter or one thousandth of the initial online offering. Any excessive subscription requests will be blocked by the trading system.
Thirdly, restrictions are released for investors with multiple accounts. In order to prevent investors with capital advantages from subscribing through multiple securities accounts, one investor is only allowed to use one securities account to make one subscription and any other subscriptions will be cancelled automatically.
Q4: How“subscription based on market value”is conducted?
A: There are five points concerning the new subscription method that worth special attention:
Firstly, the scope of securities whose market value can be included for calculation is as follows. Securities whose market value can be included for calculation refer to free-floating A-shares on Shenzhen market (including the Main Board, SME Board and ChiNext) held by investors, including securities under the accounts of margin trading and securities lending and refinancing through other securities lenders. The market values of B- shares, mutual funds, bonds and other non-tradable A- shares are excluded from calculation.
Secondly, how do we aggregate market value? If an investors has more than one securities accounts, the market value of all the securities accounts should be aggregated. The principle to be followed in determining whether multiple securities accounts are owned by the same investor is to see whether the “the name of account holder” and “the I.D. number of the valid identity document” are identical.
The market value of a client’s margin trading and securities lending credit account should be added to the market value held on his/her own. The market value held within the accounts of refinancing through other securities lenders should also be added to the market value held by the securities company.
The market value of asset management special accounts, enterprise annuity accounts and repo transactions special accounts should be calculated separately as securities account.
Thirdly, how do we determine maximum subscription quantity? An investor’s maximum subscription quantity is determined by the market value he held at the end of the day (T-2) , which means two trading days before the online subscription date (T day). Subscription is only available to investors holding market value of RMB 10,000 or more. Each RMB 5,000 is allocated to one subscription unit and any odd amount less than RMB 5,000 is ignored. Investors can subscribe to 500 shares with one subscription unit. The subscription quantity should be 500 shares or the integral multiples of 500 shares. The maximum subscription quantity is subject to the subscription ceiling.
Fourthly, market value can be calculated repeatedly if an investor subscribes for IPO shares of more than one company on the same day. If more than one company launches online offering of their IPO shares on the same day, the market value determined according to the above-mentioned methods can be used repeatedly for subscription for these IPO shares respectively.
Fifthly, subscription participants must pre-deposit sufficient funds in their accounts. Investors must deposit full subscription amount in the capital accounts before making subscription orders. Any subscription without providing sufficient funds will be deemed invalid.
The following is an example of the subscription process:
T day is online subscription day for both Company X and Company Y on SZSE. The online offering amounts for Company X and Yare 50 million shares and 20 million shares respectively. The subscription ceilings set by lead underwriters are 50,000 shares and 20,000 shares respectively. Both their issue prices are set at RMB 10.
1. Calculating market value and maximum subscription quantity
After the close of the T-2 day, an investor Z holds free-floating A- shares on Shenzhen market worth RMB 209,000 in market value. So Z can be allocated 41 subscription units, which means that his maximum subscription quantity is: 41×500=20,500 new shares. Z’s maximum subscription quantity (20,500) is lower than the subscription ceiling of Company X (50,000 shares) but higher than that of Company Y (20,000 shares). So Z can subscribe to 20,500 shares of X and 20,000 shares of Y at the most. The portion in excess of the ceiling is invalid.
2. Offering and subscription
On the T day, Z deposits RMB 40,5000 in the capital account, then subscribes for 20,500 shares of X and 20,000 shares of Y on SZSE during trading hours.
3. Allocation of numbers
On the T+1 day, CSD&C freezes and verifies the subscription amount and confirms the total valid subscription amount according to the actual amount in the capital account. Each valid subscription is numbered continuously according to subscription time, with each subscription unit assigned one number. In the case of Z, both his subscriptions for X and Y are valid, which include 41 and 40 subscription units respectively. As a result, he is assigned 41 subscription numbers for Company X and 40 subscription numbers for Company Y. After that, the lead underwriter will decide based on the total subscription amount whether a lot drawing is necessary .
Q5: What is the next step for SZSE in light of the reform initiatives in the two documents?
A: We are planning our future work in line with the on-going reforms, including:
Firstly, we will amend relevant guides and manuals. We will amend and publish the SZSE Share Offering and Listing Guide for Initial Public Offerings and Users’ Manual for Offline Placement Electronic Platform (both the version for lead underwriters and the version for investors).
Secondly, we will prepare for digital certificates. Lead underwriters and investors participating in offline placement are required to apply for a digital certificate for the electronic offline placement platform. We are in preparation and will publish a notice very soon.
Thirdly, we will organize relevant training programmes. Given the significant changes in the amended offering process, we will provide special training to lead underwriters to help them further understand relevant rules, business processes, key points for system operation, etc. with an aim to ensure the smooth and sound implementation of IPO reform.
