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SZSE recently amended and issued the Format of Announcement on Equity Pledge (Freeze, Auction, etc.) by Shareholders of Listed Companies (hereinafter referred to as “Pledge Announcement”. SZSE spokesperson answered the questions from reporters based on the background and contents of the amendments to the Pledge Announcement.
1. Q: Could you brief us on the background of the amendments to the Pledge Announcement?
A: In the early stage, due to various internal and external factors, the risk of stock pledge has drawn market attention. As various bail-out projects have been phased in and played a role, the risk of stock pledge was generally mitigated. However, in view of the excessive credit expansion by shareholders, especially high-proportion pledge financing by controlling shareholders of some listed companies, it is necessary to improve the market-oriented binding mechanism which manages stock pledge at both the supply and demand sides, and take targeted measures from the capital demand end (namely shareholders of listed companies), in a bid to further regulate stock pledge.
In order to implement the plans put forward at the symposium on comprehensively deepening capital market reform held by China Securities Regulatory Commission (CSRC) and effectively mitigate risks in stock pledge and other key areas, SZSE, after conducting sufficient market surveys and listening to opinions of all parties, played its role as the regulator of information disclosure and revised the Pledge Announcement. The amendments were made to improve the information disclosure rules of stock pledge, in an effort to standardize information disclosure of stock pledge by shareholders, urge listed companies and major shareholders to hold the “Four Bottom Lines” (bottom line of not disclosing false information, not engaging in insider trading, not manipulating stock prices, and not damaging the interests of listed companies) and adhere to the “Four Awes” (awe of the market, rule of law, professions, and risks), and maintain the stable operation of the capital market.
2. Q: What are the main idea and contents of the amendments to the Pledge Announcement?
A: The amended Pledge Announcement centers on information disclosure and is oriented to the needs of investors, which is committed to improving the effectiveness and pertinence of information disclosure. On the one hand, the hierarchical and differentiated information disclosure system has been improved. Different disclosure requirements have been proposed, which are tailored to the controlling shareholders’ different pledge proportions, thus strengthening restriction on high-proportion pledge by controlling shareholders; on the other hand, efforts have been made in clearly defining the principles and application scenarios of information disclosure, refining the disclosure requirements of relevant elements of equity pledge, deepening the mechanism for risk reveal and warning, and intensifying “third-party” verification. Through sufficient information disclosure, the rights of funders, investors and other parties concerned to be informed are further safeguarded, and their capabilities of identifying and supervising risks in stock pledge are enhanced.
Specific amendments include the following four aspects:
First, setting up a hierarchical mechanism for pledge risks and increasing the information disclosure requirements for high-proportion pledge. In the amendments, the pledge proportion of the controlling shareholder or the largest shareholder (hereinafter collectively referred to as the “controlling shareholder”) is used as the standard to classify the pledge risk, and differentiated information disclosure requirements are formed at different hierarchies, so as to disclose risks in a targeted manner. If the pledge proportion of the controlling shareholder exceeds 50%, the repayment plan within a certain period as the pledge falls due, the source of repayment funds, whether there is encroachment of the company’s interests, and impact on the production and operation, corporate governance, and fulfilment of the obligation to compensate performance of listed companies shall be disclosed, and the pledge financing funds of shareholders is encouraged to be used preferentially to meet the relevant needs regarding main businesses of listed companies; if the pledge proportion of the controlling shareholder exceeds 80%, other information concerning the specific use of pledge financing, shareholders’ credit position, reasons and necessity for high-proportion pledge, and transaction with listed companies shall be disclosed, so as to guide the controlling shareholder to form the awe of risks, reasonably control the pledge proportion, and handle the risks from the source.
Second, further clarifying the principles and application scenarios of disclosure and continuing to regulate information disclosure by shareholders. First, determining the principle of merging calculations for persons acting in concert. The stock pledge of shareholders of listed companies as well as their persons acting in concert often has the characteristics of “increasingly similar actions, risk linkage, and joint disposal”. In view of this, the amendments have incorporated shareholders of listed companies as well as their persons acting in concert into the scope of supervision and regulation. Second, defining the disclosure criteria for the risk of closing a position. As per the amendments, when shareholders and their persons acting in concert have to sell or transfer more than 5% of the stocks held by them in a listed company, relevant shareholders’ ability to perform their duties and to provide additional guarantees shall be disclosed, so as to reveal the risk information to the full. Third, adding disclosure requirements for freezing the equity. Considering that the freezing of the equity of the controlling shareholder or the largest shareholder as well as their persons acting in concert may affect the stability of the right of control over listed companies, the amendments include three additional application scenarios of disclosure, including the possible impact of the large-scale freezing of equity of the controlling shareholders on the right of control, and require shareholders concerned to fully disclose overdue debts, capital occupation, etc., as well as the impact on the production and operation of listed companies. Further, shareholders and their persons acting in concert intending to pledge equity may perform voluntary disclosure prior to the pledge.
Third, detailing the use of equity pledge, performance compensation obligations and other disclosure requirements to fully protect the investors’ right to know. The Pledge Announcement lists various potential uses of pledge, requires shareholders to fully disclose the restriction on sales and freeze of pledged and unpledged shares held by them to ensure that sponsors and investors totally understand and analyze the potential risks of equity pledge, and clarifies the specific disclosure requirements for equity pledge concerning performance compensation obligations combining with new regulations of M&As.
Fourth, increasing efforts to inspect controlling shareholders’ risks on closing position by “the third party”, and urge the parties to fulfill their duties. When the controlling shareholder’s shares are closed or forced to be transferred, a “third party” inspection mechanism will be introduced, requiring the board of directors, the board of supervisors, independent directors, sponsor institutions and financial consultants in the continuous supervision period to conduct inspections and to comment on the risk of change in the de facto control or the largest shareholder of listed companies, and on the impact of listed companies’ production and operation, corporate governance, the completion of performance compensation obligations, etc., so as to strengthen the responsibility of intermediary agency, urge all market entities to fulfill their duties, and effectively protect the legitimate rights and interests of listed companies and small and medium shareholders.
3. Q: After the amendments to the Pledge Announcement, how to apply the disclosure requirements to the existing equity pledge of shareholders?
A: The amendments are in compliance with the principles of fully disclosing the pledge of additional equity strictly according to the Pledge Announcement, and detailedly disclosing the pledge of existing equity according to the Pledge Announcement only when its pledge status changes.
4. Q: Does SZSE has any specific plans to defuse the risks of equity pledge?
A: Defusing risks in key areas such as equity pledge is a major task for comprehensively deepening the capital market reform. In recent years, SZSE has continued to improve its basic systems, actively use the market-oriented mechanism to help resolve equity pledge risks through connection and coordination, publicity and guidance, and support for problem resolution. As of 15 October 2019, the market value of SZSE’s equity pledged was down 20.12% from the beginning of the year, and the number of companies with more than 80% of equity pledged by the largest shareholder decreased by 68 from the beginning of the year. The risk of closing position for equity pledge has been eased to some extent, but the scale of equity pledge and the risk from high proportion of pledge by controlling shareholders are still worthy of attention.
In order to further prevent and defuse risks, SZSE has widely sought comments from listed companies and securities companies by means of visits, discussions and written surveys, supported and encouraged market entities to actively resolve the risk of equity pledge. SZSE has taken suggestions of various parties into consideration, adhered to the principles of marketization and legalization, accurately identified problems and adopted practicable solutions, started from strengthening the management of supply and demand of financial institutions and major shareholders, and urged securities companies and other financial institutions to optimize and adjust the positioning of equity pledge business, focus on credit risk management, enhance internal control mechanism, study and improve the self-restraint mechanism of listed companies and controlling shareholders, and concentrate on controlling the risk of pledging increased equity; SZSE has improved the basic systems including those concerning equity transfer, M&As, and refinancing to better provide policy support and help defuse the risk of existing equity pledge.
SZSE will focus on improving the quality of listed companies, continue to supervise shareholders’ pledge behavior, pay close attention to the risk of high proportion of pledge by controlling shareholders, support the defusion of equity pledge risks via product innovation, take a combination of measures to create a good market environment for the risk defusion of listed companies and their major shareholders, and work together with various parties to forestall and defuse major financial risks, in a bid to build a capital market ecosystem matching with the pilot demonstration area of socialism with Chinese characteristics.
