Mondo Visione Worldwide Financial Markets Intelligence

FTSE Mondo Visione Exchanges Index: 100,426.31 -250.91

Shenzhen Stock Exchange Optimizes The System Of Continuous Regulatory Rules For The ChiNext Board To Fully Ensure Stable, Sustainable Reform Of The ChiNext Board

Date 17/06/2020

On June 12, according to the overall arrangements for the reform of the ChiNext Board and the pilot project of the registration-based IPO system, SZSE revised and released the Rules Governing the Listing of Shares on the ChiNext of Shenzhen Stock Exchange (“Rules Governing the Listing of Shares”) and the Guidelines for the Standard Operation of Listed Companies on the ChiNext Board (“Guidelines for Standard Operation”), and formulated and issued a series of business handling guides. It is significant progress in the promotion of the reform of basic regulations concerning the ChiNext Board and an important measure to implement the new Securities Law and further refine the system of continuous regulatory rules with the Rules Governing the Listing of Shares at its core. It has provided strong support to strengthen the regulation idea centering on information disclosure, improve the quality of listed companies and promote stable, sustainable reform of the capital market.

Streamlining the system and establishing a simple, efficient system of rules

Making overall arrangements and optimizing the system. According to the new Securities Law and the Measures for Continuous Regulation of Listed Companies on the ChiNext Board (Trial), SZSE did a good job in abolishing, revising and formulating relevant business rules for continuous regulation of the ChiNext Board. SZSE revised the Rules Governing the Listing of Shares and the Guidelines for Standard Operation, abolished 14 rules including the Memo of Information Disclosure, released seven business handling guides, and established a simple, efficient system of regulatory rules with the Rules Governing the Listing of Shares at its core, the Guidelines for Standard Operation and guidelines for information disclosure as its trunk, and business handling guides as its supplements that has a clear structure and adapts to the requirements of innovation-oriented development.

Defining positioning and giving play to synergy. The Rules Governing the Listing of Shares is the basic business rules for continuous regulation of the ChiNext Board that cover listing, continuous supervision, corporate governance, information disclosure, delisting, etc. The Guidelines for Standard Operation has further made clear the code of conduct of the “critical minority” such as directors, supervisors, senior management, controlling shareholders and de facto controllers, as well as specific regulatory requirements on important issues such as information disclosure management, management of raised funds, financial aid and guarantee. Business handling guides place emphasis on the standardization of the handling procedures of information disclosure business of listed companies and aim to become an “all-in-one book” for business operations.

Rationalizing the relationship and giving priority to urgent needs. Based on years of regulatory practices of the ChiNext Board, SZSE absorbed and incorporated part of relatively mature provisions and requirements in the Guidelines for Standard Operation into the Rules Governing the Listing of Shares; added partial requirements of the memo into the Guidelines for Standard Operation, and adjusted such content as standard business handling and information disclosure operations and added it into the business handling guides. According to the principle of giving priority to urgent needs, seven business handling guides, namely, guides on handling of information disclosure business, matters concerning disclosure of periodical reports, lifting of restrictions on restricted shares, general meeting, stock ownership incentive, format of information disclosure notices and tender offer. Later, relevant rules on refinancing business will be further revised or formulated according to the requirements of upper rules.

Keeping up with the times and improving the system of continuous regulatory rules

Optimizing listing conditions with easy entrance and strict exit and improving the delisting mechanism. First, SZSE cleared the “entrance”, formulating more diversified, richer listing conditions that allow enterprises that haven’t realized profit yet, red chip enterprises and enterprises with a special equity structure to be listed on the ChiNext Board, adapt to the listing demands of innovation-oriented enterprises and startups in different growth stages and of different types and expand market coverage and inclusiveness. Second, SZSE strictly guarded the “exit”, enriching and refining delisting indicators. Net profit is the result after deducting non-recurring gains and losses, and the indicator of operating income is combined to precisely clear shell companies that do not have sustainable operation ability; delisting indicators concerning market capitalization were added and trading-related indicators were refined to give full play to the function of market-oriented delisting; the delisting process was optimized, listing suspension and listing resumption were cancelled, the delisting transitional period for trading-related delisting was removed. The suspension time point for compulsory delisting in the event of a severe violation was postponed and the “escape period” was cancelled to improve delisting efficiency. Third, based on different delisting scenarios, SZSE refined arrangements for the transitional period, defined market expectations, realized stable transition and ensured the coupling between old and new rules was fair and reasonable.

Alleviating burdens, delegating powers, reducing the cost of market players, and adapting to market development needs. SZSE implemented the requirements to delegate power, improve regulation, and upgrade services, cancelled the pre-event approval requirements on exempted and suspended disclosure, made it clear that listed companies should determine themselves the content for exempted or suspended disclosure and corresponding regulations. By taking into full account the characteristics of innovation-oriented enterprises and startups, SZSE relaxed the disclosure standards for transactions and related-party transactions and simplified deliberation procedures, and cancelled the requirement of compulsory disclosure of preliminary earnings estimate to reduce information disclosure cost. SZSE improved the requirements on equity transfer in the event that controlling shareholders, de facto controllers and their related parties occupy listed companies’ funds or the guarantee provided by listed companies is not relieved, which can help relevant entities raise funds and defuse risks. SZSE deleted the regulatory requirements that financial aid may not be provided to external parties during the replenishment period of working capital with idle raised funds and financial investment or high-risk investment may not be made 12 months before replenishment of working capital with over-raised funds. The mandatory requirement that funds should be returned to relevant special account before the expiry of the replenishment period of working capital with raised funds was optimized to improve listed companies’ autonomy and flexibility.

Adopting precision regulation, strengthening corporate governance, and focusing on the “critical minority”. First, SZSE regulated differentiated arrangements for voting rights and refined the setup procedures of special voting rights, shareholding entities, sunset provisions, voting right multiple and proportion, important issues subject to the one-share-one-vote principle, the supervision responsibilities of the Board of Supervisors and the continuous monitoring responsibilities of sponsor institutions to prevent abuse of special voting rights damaging small and medium-sized investors’ rights and interests. Second, to prevent the risk of high-ratio shareholding pledge, SZSE required controlling shareholders to pledge shares prudently, reasonably use and inject funds and maintain control and stable production and operation, and guided controlling shareholders to reasonably control the pledge ratio. Third, regarding the situation that it’s deemed that a company has no de facto controller due to fight over the right of control and malicious avoidance of responsibilities and obligations, SZSE further standardized recognition of control. Fourth, SZSE revised and improved the statement and letter of commitment of the controlling shareholder, de facto controller, directors, supervisors and senior management, formulated the statement and letter of commitment for red chip enterprises, and defined the obligations and responsibilities of the “critical minority”.

Strengthening disclosure, adding risk warning regulations, and improving information disclosure effectiveness. First, SZSE added delisting risk warning regulations (*ST regulations) and other risk warning regulations (ST regulations) to fully warn investors about delisting risks in a company such as abnormal financial conditions and major violations, or about serious abnormal situations such as production or operation halt, illegal guarantee and occupation of funds. Second, SZSE refined disclosure requirements for industries and risks. According to the requirements of the registration-based IPO system, both good and bad news should be disclosed clearly to provide sufficient information for investors’ decision-making. SZSE made it clear that listed companies should strengthen disclosure of information on industry characteristics, business operation, core competitiveness, debts and liquidity risk. Besides, it also clearly required enterprises that hadn’t realized profit yet should fully disclosure the reason for not realizing profit yet and its impact on going-concern operation and give sufficient risk warnings, and indicate the risk that no profit was realized yet in a marked position in the annual report so investors can quickly identify it.

Urging intermediaries to fulfill responsibilities, and giving play to their function of continuous supervision and guidance. Intermediaries’ fulfillment of responsibilities is the basis to ensure stable and orderly promotion of the reform of the registration-based IPO system. In the revision, SZSE further enhanced the continuous supervision and guidance responsibilities of sponsor institutions, defining their obligations to pay attention to and check a company when the company’s share price shows seriously abnormal fluctuations or it is faced with major risks in daily operation and their obligations of onsite verification in the event of a major violation such as fraud or occupation of funds. In the meantime, SZSE added the requirement that sponsor institutions and sponsor representatives, financial consultants and sponsors should fulfill the obligation of continuous supervision and guidance on fair information disclosure of listed companies and fully play their role as the “gatekeeper”.

Formulating regulations in an open way, absorbing and taking reasonable advice from the market

In the process of revision of the continuous regulatory rules, SZSE fully listened to the voice of market players including listed companies, securities companies, fund companies and investors. After summing up and combining content of the same nature, SZSE received a total of 38 pieces of feedback. The feedback on the Rules Governing the Listing of Shares is mainly about listing conditions, institutional arrangements for share lessening, scope of continuous supervision and guidance responsibilities of sponsor institutions and delisting indicators; the feedback on the Guidelines for Standard Operation concerns mainly interpretation of relevant articles, optimizing specific regulatory requirements, etc. After carefully studying and fully demonstrating the advice and feedback given by market players, SZSE took 17 pieces of such advice and made the following adjustments:

Improving the listing and delisting conditions for red chip enterprises. SZSE adjusted the listing conditions on share capital and equity structure for red chip enterprises, making clear that the share capital should be calculated based on the sum of shares and the number of depository receipts, and defining the standard of “rapid growth of operating income” in the listing conditions. SZSE adjusted relevant standards on trading-related delisting for red chip enterprises, stating that when the “face value delisting” indicator is applicable, the standard that “the daily closing price is lower than RMB 1 for 20 consecutive trading days” should be adopted and that the “number of shareholders” delisting indicator is not applicable when red chip enterprises issue depository receipts.

Adjusting and improving partial delisting indicators. SZSE adjusted the market capitalization delisting indicator to that the daily closing market capitalization is less than RMB 300 million for 20 consecutive trading days, and improved the finance-related delisting standards, stating that when a company is required to provide qualified opinion in the financial statements of next year after *ST is enforced for meeting finance-related delisting indicators, the company will be delisted, so as to enhance the function of finance-related delisting indicators and market clearing.

Defining listing conditions on issuance of shares and convertible corporate bonds by listed companies. To implement the requirements of the new Securities Law and ensure good connection with upper rules, SZSE made it clear in the Rules Governing the Listing of Shares that “listed companies shall still meet corresponding issuing conditions when applying to list shares or convertible corporate bonds on SZSE” to keep in line with the actual implementation of refinancing, and SZSE didn’t add new listing conditions.

Moreover, based on feedback of the market, SZSE defined the deadline of disclosure of special reports on deposit and use of raised funds, cancelled the requirement on reporting the information of insiders’ near relatives in the process of profit distribution, and further improved the expression of relevant rules to make them easier to understand and implement.

Continuing optimization and promoting stable, sustainable reform of the stock market

Revising and improving the continuous regulatory rules for the ChiNext Board comprehensively is an important link in promoting stable reform of the stock market. Relevant rules involve many aspects and a lot of changes in articles. SZSE will do a good job in the training and interpretation of rules after revision, help listed companies better understand, observe and implement rules, promptly track and evaluate the implementation of rules, and optimize the system of continuous regulatory rules based on the needs of reform and development and daily regulation practices.

Steadily advancing training of rules and urging market players to implement rules. After the rules are released, SZSE will organize series special training sessions, do well in policy consulting, rule interpretation and other relevant work, help listed companies and relevant entities get familiar with the latest requirements timely, and urge listed companies to strictly implement relevant rules. In addition, according to the arrangements for the transitional period, SZSE will properly handle companies that involve delisting situations after disclosure of 2019 annual reports, stabilize market players’ expectations and maintain a fair, just market.

Improving evaluation and accumulating experience for the deepening of the reform of the capital market on all sides. The “increment + stock” reforms are advanced synchronously for the first time in the reform of the ChiNext Board and the pilot project of the registration-based IPO system. SZSE will follow the arrangement and requirements of China Securities Regulatory Commission (CSRC), fully implement the new Securities Law, adhere to general principle of putting stability in the first place and pursuing progress while ensuring stability. It will do a good job in connection between old and new rules, and steadily promote the reform of the ChiNext Board market. SZSE will continue to sum up new situations and new problems found in daily regulation, collect and evaluate the feedback of market players on the implementation of the rules, study and demonstrate such feedback, and make adaptive revision to the rules in a timely manner. SZSE will also continue to improve the basic regulations for the stock market and accumulate experience for the promotion of the registration-based IPO system across the market.