Shenzhen Stock Exchange Issued Implementation Rules On Preferred Share Pilot Business

In order to standardize the listing, trading, transfer, information disclosure and other business of preferred shares during the pilot period, and for the purpose of protecting investors’ legal rights and interests, the Shenzhen Stock Exchange (SZSE) recently issued Implementation Rules on Preferred Share Pilot Business (hereinafter referred as Implementation Rules), which came into effect immediately upon its issuance. The Implementation Rules is compiled in the light of The Company Law of the People’s Republic of China, Securities Law of the People’s Republic of China, Guiding Opinions of the State Council on Carrying out the Pilot Program of Preferred Shares (hereinafter referred as Guiding Opinions), Administrative Measures on the Pilot Program of Preferred Shares (hereinafter referred as Administrative Measures), and relevant regulations.

The preferred share is a hybrid investment and financing instrument that fall in between stock and bonds. Its product design incorporates both the attributes of stocks and bonds. During the pilot period, preferred shares of SZSE shall be mainly issued by means of non-public offerings. Compared with public offerings, privately offered preferred shares are more flexible on issuance conditions, dividend rate and profit distribution, with emphasis on its stock attributes. Therefore, during the process of enacting the Implementation Rules, the SZSE will abide by the following principles:

First, supportive arrangement regarding the listing, trading, transfer and information disclosure of preferred shares shall be carried out on the basis of higher-level laws and regulations including the Company Law, Securities Law, Guiding Opinions and Administrative Measures.

Second, based on the definition of preferred shares being categorized as other type of stocks, and taking into consideration the features of multi-tiered capital market of SZSE, we shall manage preferred shares in the same way as common shares regarding share management and trading supervision, etc.

Third, to highlight the innovative feature of preferred shares, space is reserved for its systematical innovation. Only some regulations in principle are provided for the redemption and resale.

Implementation Rules consists of 6 chapters with 60 articles, containing General Provisions, Issuance and Listing, Trading and Transfer, Information Disclosure, Conversion and Resale, and Supplementary Provisions, with the main contents of each chapter as following:

1. General Provisions. The objectives and basis of enacting the Implementation Rules, and definition and applying scope of preferred share are provided herein. As preferred share is a new type of securities, in order to make sure that investors have certain knowledge and understanding on the features and risk of preferred shares, the Implementation Rules promulgates obligation for members to introduce the product and risk disclosure to investors.
2. Issuance and Listing. Those preferred shares, publicly offered and subscribed to with cash via online subscription through the trading system, are applicable to the Implementation Measures on Subscription for Online Public Offering Shares with Cash. The threshold for listing and trading of preferred shares are the same as those of common shares, convertible bonds and corporate bonds, i.e. actual raised fund shall be no less than RMB 50 million. A “special procedure” of the listing committee is applicable to the approval of application for listing.
3. Trading and Transfer. Public offering preferred shares can be traded via auction trading and block trading, while non-public offering preferred shares can be transferred via negotiated block trading platform. As it is difficult to distinguish the major events that affect the price of common shares and preferred shares, and it is possible that the two types of shares influence each other’s prices, it is provided in Implementation Rules that the trading suspension and resumption of preferred shares shall be kept the same as that of common shares. In avoidance of the risk of market speculation, every single buy order of auction trading shall be in round lots of 100 shares. Preferred shares are subject to 10% upper and lower price limits during the first and ensuing trading days. Verification standards for abnormal price variations are different from those of common shares; the auction trading of preferred shares will be included in the real-time quotation, but shall not be included in the calculation of index. And other matters of preferred shares shall be applicable to relevant regulations on Trading Rules of SZSE. The investor suitability standards for the transfer of preferred shares should remain the same as those for the issuance session. Number of shareholders of preferred shares privately offered under the same conditions shall not exceed 200 after the transfer. Members shall be responsible for investor suitability management. Transfers that involve more than 200 investors would not be recognized by SZSE.
4. Information Disclosure. For more convenient implementation, the Implementation Rules has set rules for regular disclosure of matters of preferred shares, including board meeting and shareholding meeting announcements, issuance, listing, periodic report, and interim report, etc. It is also provided the situations that require the consolidated calculation of common shares and preferred shares that have been resumed of voting rights. The announcement regarding resumption and termination of voting rights of preferred shares shall be disclosed in a timely manner; disclosure is required when certain investor’s holding of preferred shares reach 20% of the total preferred shares and upon each 10% increase or decrease afterwards. Matters regarding share repurchase, major restructuring should undergo the stipulated approval and disclosure procedures. Moreover, the Implementation Rules also specifies disclosure requirements on dividend distribution, redemption and resale.
5. Conversion and Repurchase. As it is provided the conversion and repurchase of preferred shares in the document jointly issued by China Securities Regulatory Commission (CSRC) and China Banking Regulatory Commission (CBRC), Implementation Rules do not repeat such provisions, but give clear guidance on the above documents. Considering that preferred shares are an innovative type of securities, in order to reserve space for its systematical innovation, the Implementation Rules only set principles on redemption and resale, without making restrictive requirements on specific operations.
6. Supplementary Provisions. First, matters regarding the delisting of preferred shares are provided. As preferred shares are in the pilot stage, it is difficult to formulate a differentiated delisting system. Except for ownership distribution, stock accumulated trading volume, daily stock closing price, relevant matters shall be dealt with according to the Listing Rules and ChiNext Market Listing Rules until situation of preferred share is mature. Second, SZSE’s responsibility of taking supervision and punishment measures on rule violators is provided. Third, the shareholding calculation formula in the event of consolidated calculation of common shares and preferred shares that have been resumed of voting rights is provided. Fourth, the charging standard of the expenses of preferred share is provided.