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To better implement the strategy of innovation-driven development, and to give full play to the active role of the bond market of the stock exchange in promoting innovation and entrepreneurship and serving the real economy, China Securities Regulatory Commission (“CSRC”) recently released the Guidance of CSRC on Launching Pilot Bond Projects by Innovative Companies and Start-ups ( “Guidance”). As per the arrangements of CSRC, Shenzhen Stock Exchange (“SZSE”), National Equities Exchange and Quotation Co., Ltd. (“NEEQ”) and China Securities Depository and Clearing Co., Ltd. (“CSDC”) formulated and promulgated the Rules for Private Placement of Convertibles Bonds by Innovative Companies and Start-ups (for Trial Implementation, hereinafter as “the Implementing Rules”).
Below are the four main features of the Implementing Rules.
First, the issuers for private placement of convertible corporate bonds are specified, so is the scope of the issuers. The issuers for non-public offering of convertible bonds as an innovative company or start-up (hereinafter as “innovation and entrepreneurship convertible bonds”) should meet the regulatory requirements for non-public issuance of corporate bonds first and should qualify as an innovative company or start-up as defined by the Guidance. Issuers include the innovative companies listed on NEEQ and non-listed companies (either on stock exchanges or NEEQ).
Second, it is specified that innovation and entrepreneurship convertible bonds should be offered by means of private placement. The innovation and entrepreneurship convertible bonds should satisfy the conditions for transfer of privately placed corporate bonds as per relevant provisions. The Implementing Rules, based on the particularity of the conversion clause, provides that the shareholders of issuers conducting private placement of convertible bonds shall not exceed 200 prior to the placement, and that the duration of the bond shall be not more than 6 years; that an issuer shall provide specification on the determination and adjustment of the conversion price, and on arrangements for profit compensation in case of failure of conversion; and that for convertible bonds issued by innovative companies listed on NEEQ, bondholders need to apply for permission for public transfer on NEEQ as a qualified investor prior to the conversion.
Third, the conversion procedure is specified. Bond conversion is allowed 6 months after the issuance of innovation and entrepreneurship convertible bonds. The procedure mainly consists of conversion declaration and operation. The conversion declaration is made by investors to SZSE during the conversion period. Besides, the Implementing Rules provides clear conversion operating procedures for innovative companies listed on NEEQ and non-listed companies.
Fourth, there are specified requirements for information disclosure. During the declaration period, the issuer is required to disclose the current equity structure, the conversion price and its determining method, arrangements for conversion and profits compensation and etc. The Implementing Rules prescribes that within the duration of the bonds, the issuer and other persons responsible for information disclosure should perform their disclosing obligations in compliance with relevant provisions of SZSE on private placement of corporate bonds and as agreed under the bond prospectus, and that the time of disclosure shall not be later than that in other trading places. Issuers shall disclosure matters related to the conversion in their periodic reports. It is also provided in the Implementing Rules that issuers should timely submit to SZSE and disclose the provisional reports in case of adjustment of the conversion price, suspension or termination of transferring of the stock of the issuer, failure of the bondholder’s to convert the bonds and other events that might have an major impact on the trading price of the convertible bonds or the investing decision of investors.
The Implementing Rules takes effect on September 22, 2017.
A relevant officer from SZSE expressed that on one hand, the conversion clause enriches the financing means of SMEs and reduces the financing costs of issuers. On the other, it protects the legitimate rights and interests of institutional investors who convert their bonds as per the clauses entered into with issuers regarding profit compensation. The formulation of the conversion clause also enhances the appeal of the privately placed corporate bonds in the market, and effectively promotes innovation of the capital formation mechanism of innovative companies and start-ups. Next, SZSE shall, guided by CSRC, continue to reform the capital market, promote public entrepreneurship and innovation, vitalize the market, and serve the real economy in a thorough way.
