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Consultation for Shanghai-London Stock Connect Provisions
31-08-2018

CSRC solicits public comments on the Provisions on the Supervision and Administration of Depository Receipts under the Stock Connect Scheme between Shanghai Stock Exchange and London Stock Exchange

(for trial implementation)
 

Building on the outcomes of President Xi's state visit to the UK in October 2015 and China-UK Economic and Financial Dialogue, relevant authorities of the two countries agreed through consultations to establish a market connect scheme between the Shanghai Stock Exchange (SSE) and the London Stock Exchange (LSE), allowing listed companies of the two markets to cross-list depository receipts (DRs), a program often known as the Shanghai-London Stock Connect.

 

In order to regulate business activities under the Shanghai-London Stock Connect such as DR issuance, listing, trading, information disclosure, cross-border conversion, the China Securities Regulatory Commission (CSRC) drafted the Provisions on the Supervision and Administration of Depository Receipts under the Stock Connect Scheme between Shanghai Stock Exchange and London Stock Exchange (for trial implementation) on the basis of the Administrative Measures of Offering and Trading of Depository Receipts (for trial implementation) (the Administrative Measures, CSRC Order No. 143). The Provisions stipulates normative requirements for market entities as well as their activities under the Shanghai-London Stock Connect, committed to the principles of protecting the legitimate interests and rights of investors, maintaining market order, and containing financial risks. The Provisions is open for public comments as of today.

 

The Provisions contains 30 articles covering the following aspects.


First, to establish the review and approval regime for CDRs issuance under the Shanghai-London Stock Connect. CDR issuance under the Shanghai-London Stock Connect shall comply with applicable regulatory requirements for public offering of CDRs specified in the Administrative Measures. The Provisions provides specifics on required application documents, review and approval procedure, sponsors, due diligence, accounting and auditing requirements, and amount cap on CDRs in proposed issuance, etc..


Second, to set up the cross-border conversion mechanism for CDRs. On the basis of the Administrative Measures, the Provisions provides specifics on the two types of cross-border conversion, namely creation and redemption, sets forth the eligibility criteria and registration requirements for Chinese Mainland securities companies to engage in such business, and puts forward code of conduct for cross-border conversion institutions regarding assets custody and overseas investments, etc..


Third, to clarify continuing regulatory and supervisory requirements for CDRs. In principle, the continuing regulation and supervision of CDRs are in line with applicable provisions concerning overseas listed red-chip companies as stipulated in the Implementing Measures for Ongoing Supervision of Innovative Enterprises Following Listing of Domestically Offered Stocks or Depository Receipts (for trial implementation). Issuers of the underlying securities are hereby not subject to compulsory quarterly reporting requirements. Meanwhile, in the event of material asset restructurings by the issuer of the underlying securities, simultaneous disclosure to the Chinese Mainland market in accordance with the regulations in the issuer's listing market would suffice so long as the proposed restructurings do not entail CDR issuance in the Chinese Mainland market.


Fourth, to set up regulatory framework for GDR issuance by domestic listed companies. Domestic GDR issuers are subject to regulations applicable to overseas listing. Given that GDRs are convertible with tradable A-shares in the Chinese Mainland market, the Provisions balances between preventing regulatory arbitrage and upholding commercial viability, and puts in place defined terms on GDR issuance conditions, offering price, lock-up period for redemption, as well as requirements on foreign securities companies and depositary banks.


Fifth, to reinforce enforcement activities against misconducts with clearly defined legal responsibilities. On the basis of the Administrative Measures, the Provisions particularizes the regulatory requirements on cross-border conversion institutions and, within the framework of the Securities Law, specifies the legal responsibilities of all relevant market participants.

 

The Shanghai-London Stock Connect is a significant step to further the two-way opening of Chinese capital markets in response to the directives of the 19th National Congress of the Communist Party of China (CPC). To launch the program in a smooth and orderly manner, the CSRC invites stakeholders of all sectors to contribute their suggestions and comments on the Provisions.



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