Regulatory Commission to the Reporters’ Questions on the Issues related to the Bond Issue of Securities Companies

On August 29, Shang Fulin, the Chairman of the China Securities Regulatory Commission (hereinafter referred to as the CSRC) issued the decree of the CSRC, namely, the Interim Measures on the Bond Administration of Securities Companies (hereinafter referred to as the Interim Measures). As regards the questions in which all the parties in the market have much interest, the relevant leaders of the CSRC respond to the reporters’ questions.

Question (hereinafter referred to as the Q): Would you please describe the background and characteristics for issuing the Interim Measures?

Answer (hereinafter referred to as the A): Currently, the securities companies have only four legitimate financing channels including the repurchase of national debts, share mortgaged loans, inter-bank borrowings, increased shares and expanded shares or initial public offerings. The present financing channels of securities companies are structurally less comprehensive and obviously inadequate. The funds raised by the securities companies through their current financing channels have the problems like the small amounts, short terms and high costs.

For the purpose that the securities companies can improve their financing structures, increase their capacities of sustainable development, strengthen their comprehensive competitiveness and anti-risk capacities and promote the development of our bond market by issuing the bonds, the CSRC formulates and promulgates the Interim Measures.

Meanwhile, the bonds of securities companies are deemed as the new attempt in which the CSRC tries actively to promote the development of company bond market.

Q: How about the characteristics of the Interim Measures?

A: The characteristics can be mainly seen in the following aspects: firstly, strictly stipulating the responsibilities of bond-issuing entities for good faith, developing the well-established bond-repayment mechanism and requiring the issuers to guarantee the performance of bond-repayment obligations through various measures; secondly, strengthening the information disclosure obligations of bond-issuing entities and protecting the investors’ interests through the standardized and sufficient information disclosure; thirdly, exploring actively the bond-issuing methods, introducing the concept of qualified investors while the securities companies are allowed to openly issue the bonds, and allowing the securities companies to issue the bonds targeted at the qualified investors; fourthly, setting up the mechanism of creditor"s agents and requiring the securities companies to recruit the creditor"s agents for the investors so that the creditor"s agents can supervise the bond issuers within the authorized scope on behalf of many bondholders(unless there are special cases); fifthly, setting up the bondholders’ meetings as stipulated in the contracts and developing the collective opinions on the events related to important events of bondholders in order to fully protect the bondholders’ interests.

Q: What methods do the securities companies use to issue the bonds?

A: As approved by the CSRC, the bonds of securities companies can be openly issued in the society or targeted at the qualified investors. The targeted bonds can be issued only to the qualified investors and shall never be openly issued in direct or disguised form.

Q: What are the qualified investors? Why shall the targeted bonds be issued only to the qualified investors?

A: The qualified investors refer to the legal entities or investment organizations established according to the related laws, which believe themselves to have the ability of independent analysis and the risk-bearing ability necessary for issuing the bonds, claim the qualifications for making the bond investment according to the regulations and articles of association, and have the registered capital of over CNY 10 million or the audited net asset of over CNY 20 million.

The targeted bonds can be only issued to and transferred among the qualified investors so as to develop the decentralized risk-bearing system of bond market, gradually cultivate the qualified investors of securities market and promote the deepening and development of bond market investment towards a more rational level and a stronger risk analysis and bearing ability.

Q: What conditions shall the securities companies meet for issuing the bonds?

A: Above all, the bond issue of the securities companies shall comply with the related stipulations of the Company Law, that is, the accumulated sum of bonds shall not exceed 40% of the net assets in the companies; the allocable profits during the last three years can repay the one-year interests on the corporate bonds; the funds raised by issuing the bonds are invested according to the national industrial policies; the interest rates of bonds shall not exceed the level as prescribed by the State Council.

Next, the bond issue of the securities companies shall also abide by the following provisions: all the risk monitoring indicators meet the related regulations of the CSRC; there are nothing like the serious acts in violation of laws and regulations during the last two years; having the well-established operating system for shareholders’ meetings and the boards of directors as well as the effective internal management system; claiming the proper business separation and internal control technique supporting system; the assets are not occupied by the natural persons, legal entities or other organizations their affiliates with the actual control right.

Thirdly, the securities companies to issue the bonds shall be the comprehensive securities companies which have the un-audited net assets of at least CNY 1 billion at the end of the latest period; the securities companies to issue the targeted bonds shall have the un-audited net assets of at least CNY 0.5 billion at the end of the latest period

Q: What application documents for bond issue shall be submitted by the securities companies to which departments?

A: Firstly, the securities companies shall submit the following documents to the Public Offering Supervision Department of the CSRC: the application reports of the issuers, the resolutions of shareholders’ meetings and boards of directors, the letters of recommendation issued by the major underwriters (with the investigation reports of duty performance), the prospectus (with the issue plans), the legal opinions (with the lawyers’ working reports), the audited financial accounting reports during the last three years or the last year, the credit rating reports and descriptions of the follow-up rating arrangement, the special reports on debt-repaying plans and security measures, the cash analysis reports on repaying the bond principals and interests for the period, the guarantee contracts and relevant documents, as well as other documents required by the CSRC.

Next, the securities companies shall also submit to the Public Offering Supervision Department the declaration statements of letters of supervisory comments on bond issue, make the item-by-item self-statements of the required contents and describe the sources and reasons(as the attachments of declaration statements). The securities companies may provide the additional explanations in the form of said attachments if some issues can’t be described in the declaration statements. The statements shall be signed and officially sealed by the specific persons in charge, and the legal representatives and general managers of the companies.

Q: What do the declaration statements of letters of supervisory opinions include? How to issue the letters of supervisory opinions?

A: The said statements and their attachments involve the major contents such as the corporate legal person governance structure, the corporate internal control work and the conditions related to the bond issue.

The corporate legal person governance system includes whether the shareholders of securities companies are the actual financial contributors, whether they have been registered in the national administrative departments for industry and commerce, whether the actual shareholders’ conditions are consistent with the shareholders’ rolls, the articles of association and the contents recorded in the registration documents of industry and commerce; whether the shareholders, the actual controllers and the final benefit holders claim the qualifications and conditions as prescribed by the laws, regulations and the CSRC; whether all the senior managers have passed the inspections of post-holding qualifications by the CSRC, whether they assume their current posts even without the necessary qualifications, whether they issue the letters of commitment to good faith, signed by themselves, which stress the operation of legal compliance, and the assumption of liabilities for the risks incurred by the business against the related regulations; whether the corporate assets are occupied by the natural persons, legal entities or other organizations and their affiliates with actual control rights; whether the companies make the long-term equity investments for their shareholders; whether their shareholders are provided with the financing sources, financing warranties and financing transactions or receive the companies’ equities as the target of hypothecation; whether the companies’ applications for issuing the bonds have passed the discussions and approvals at the shareholders’ meetings; whether the shareholders and senior managers of the securities companies have corrected any unregulated conducts and problems before their applications for the bond issue.

The corporate internal control work includes whether the companies establish the effective internal control system and mechanism in accordance with the internal control guidance, whether they have the proper business separation and internal control technical support system, whether the companies have the independent supervision and check departments and persons to perform the monitoring functions of check over legal compliance, and whether the companies establish and improve the alarming and supplementary mechanism of net capitals.

The issues related to the bond-issuing conditions shall be stated on an item-by-item basis by the applications in reference to the bond-issuing conditions and in accordance with the corporate situations. The applicants shall copy and send the related issues to the Institution Supervision Department of the CSRC (as the attachments of declaration statements) while the said issues are submitted to the Public Offering Supervision Department of the CSRC.

As the Institution Supervision Department of the CSRC have received the declaration statements of letters of supervisory comments and the related materials from the securities companies to issue the bonds, they shall issue the letters of supervisory comments to the Public Offering Supervision Department according to the acquired information. The said letters constitute the integral documents for the securities companies to issue the bonds.

Q: Can the contrasting comprehensive securities companies apply for issuing the bonds?

A: In compliance with the current regulations of the CSRC, the contrasting comprehensive securities companies share the same scopes of business with the comprehensive securities companies. Thus, the former can apply for issuing the bonds.

Q: How to review and verify the bond issue of the securities companies?

A: The Public Offering Supervision Department of the CSRC is responsible for reviewing and verifying the bond issue and the Institution Supervision Department shall assist with the supervision work by issuing the letters of supervisory comments. The CSRC will, in accordance with the review and supervisory principle of openness, impartiality and justice, accept the bond-issuing applications of the securities companies with the well-established internal control mechanism, good asset quality, standardized operation and capability of full guarantee for the bond issue.

Q: How about the stipulations on the term of securities company bonds?

A: The shortest term is one year while the longest term is five years.

Q: How about the stipulations on the bond-issuing scales of securities companies?

A: In accordance with the stipulations of the Company Law, the accumulated sum of bonds in the securities companies shall not surpass 40% of the corporate net assets. When it comes to the bonds issued publicly, the total surface values of bonds sold within the period of sales shall account for no more than half of the total surface values of bonds to be issued. If the bonds fail to meet the conditions for getting listed, the bond issue will be regarded as a failure if the total surface value of issued bonds is less than CNY 0.2 billion. In case of the failed issue, the issuers shall return to the subscribers the sums according to the issue prices and plus the interests on bank deposits during the same period.

Additionally, in consideration of the business features of securities companies and the net capitals of issuers, the CSRC will monitor their bond-issue scale to control their bond-repayment risks.

Q: How about the stipulations on the interest rates of the securities company bonds?

A: The interest rates of bonds shall be determined through consultation by the issuers and their main underwriters according to such factors as the credit level, risk degree and market supply and demand, but must conform to the related administrative regulations on the interest rates of enterprise bonds, and shall not exceed the interest rates as prescribed by the State Council.

Q: Is warranty an imperative condition for the securities companies to issue the bonds? How to determine the sum of warranty?

A: The issuers shall provide warranty for the bond issue. Yet, in case of the targeted bonds, if the future subscribers pledge in writing to make their subscriptions of all the bonds and not to transfer the bonds in the transfer market, the issuers are exempt from providing any warranty once approved in writing by the future subscribers. In case the guarantee is provided for the bond issue, the guarantors shall be able to repay the debts on behalf and willing to assume the joint liabilities. In case the hypothecation or pledge is provided for the bond issue, the hypothecated or pledged properties shall be assessed by the asset assessment institutions with the necessary qualifications.

The sums of guarantee for the bonds issued publicly shall be at least the total sums of bond principals and interests while the sums of guarantee for the targeted bonds shall be at least half of the total sums of bond principals and interests.

Q: How about the stipulations on the credit rating for the securities company bonds?

A: The issuers shall recruit the credit rating institutions approved by the CSRC to conduct the credit rating of issued bonds and make arrangements for follow-up rating. In case of the targeted bonds, if the future subscribers pledge in writing to make their subscriptions of all the bonds and not to transfer the bonds in the transfer market, the issuers are exempt from the credit rating once approved in writing by the future subscribers.

The credit rating institutions shall issue the initial and follow-up rating reports according to the Guidelines on the Credit Rating Reports of Securities Company Bonds Issued by the credit rating institutions, and assume the responsibilities for objectivity, justice and timeliness of rating results.

Q: Can the securities company bonds get listed and traded? How to transfer them?

A: In case of the bonds issued publicly, the applications shall be filed for their getting listed to participate in the centralized bidding transactions. As approved by the CSRC, they can be transferred by other means. The following conditions shall be satisfied if the bonds are to get listed: the applications for bond issue has been approved and the bond issue comes to an end; the total surface values of bonds actually issued shall be at least CNY 0.2 billion; as the applications for getting listed are filed, they shall still conform to the conditions for public issue; other conditions as required by the CSRC. If the securities companies with their bonds getting listed are found in the situations as described in Article 55 and Article 56 of the Securities Law, the stock exchanges can made the decisions on suspended transactions or terminated listing.

The targeted bonds can be transferred in the form of contracts and also by other means approved by the CSRC. The smallest transfer unit shall be no less than the surface value of CNY 0.5 million. The bonds shall be transferred among the qualified investors and comply with the business rules of transfer area. The administrative measures on the transfer of targeted bonds are being studied and formulated.

Q: How about the stipulations on the repayment measures of securities company bonds?

A: First and foremost, the issuers shall be retain the creditor"s agents for bond holders and sign the agreements on creditor agency to specify the rights, duties and liabilities for breach of contract among the issuers, bond holders and creditor"s agents. The creditor"s agents shall earnestly perform their duties of honesty, good faith, prudence and effective management, strictly abide by the stipulations of agency agreements and fulfill the following obligations: when the important benefits of bondholders may be affected by the delayed repayment of bond principals and interests and other matters, they shall urge and remind the issuers without delay, and inform the bondholders; they shall supervise the special bond-repayment accounts, the use of raised funds and the guarantee-related issues according to the stipulations; they shall serve as attorneys of the bondholder and issuers for their negotiations and lawsuits; they shall be responsible for other issues authorized by the bondholders’ meetings.

The creditor"s agents shall develop the operating rules of agency business, take effective measures to protect the lawful rights and interests of bondholders and issue on a regular basis the creditor agency reports.

Next, the issuers must set up the special bond-repayment accounts for repaying the bond principals and interests, and define the sources of account funds, modes of withdrawal and the account supervision and management. The funds of this account can be intended for investing in the low-risk and high-liquidity products, or for repaying the bonds in advance as stipulated.

Thirdly, the issuers shall develop the resolutions through their shareholders’ meetings and increase the proportion of free surplus reserve funds and ordinary risk reserve funds to lower the repayment risks.

Fourthly, the issuers shall develop the resolutions through their shareholders’ meetings and take the following measures as the funds on the special bond-repayment accounts can’t be withdrawn as stipulated or the bond principals and interests can’t be repaid. They shall not distribute the profits to the shareholders; they shall suspend the implementation of some equity-type expenditure projects such as the major foreign investments and acquisitions and mergers; they shall reduce or cease the salaries and bonuses of the directors and senior managers; the major persons in charge shall not be transferred to the new posts and units.

Fifthly, the issuers shall appoint the special personnel to be responsible for the bond affairs. Within 15 working days before the repayment day of bond principals and interests, the issuers shall organize the repayment working teams to be responsible for repayment of bond principals and interests as well as other affairs.

Sixthly, If the issuers agree to make the advance repayment according to the repurchase or agreed conditions before the bonds expire, they shall avoid impairing the interests of bondholders and treat all the bondholders fairly. Within the duration of bonds, the issuers shall never change the stipulations of prospectuses alone. If any changes are rendered necessary by special cases, they shall notify the creditor"s agents in time and obtain the consents from the bondholders.

Q: On which occasions shall the bondholders’ meetings be held?

A: The bondholders can exercise their rights alone or through the bondholders’ meetings. The prospectuses shall stipulate the rights, procedures and effective conditions of resolutions for the bondholders’ meetings. The bondholders’ meetings shall be held in case of any following situation: the issuers suggest changing the stipulations of prospectuses; the issuers can’t repay the principals and interests on schedule; the issuers reduce the investments, merge, separate, dissolve or apply for bankruptcy; the guarantors or the guaranteed objects undergo major changes; the bondholders with the face value of over 10% suggest changing the creditor"s agents.

The issuers, guarantors, shareholders holding the bonds of this period and over 10% of issuers’ equities as well as other major affiliated parties can participate in the bondholders’ meetings and make the proposals, but have no voting rights.

Q: What requirements for information disclosure shall the securities companies to issue the bonds meet?

A: The securities companies to issue the bonds shall make the prospectuses, the annual reports, periodic reports, and announcements on major events in accordance with the related stipulations of the CSRC, perform the continuous information disclosure, and guarantee the authentic, precise, complete and timely disclosure of all the information that has material impacts on the investors. By no means shall the issuers and the related parties misguide the investors into purchasing the bonds.

The bonds issued publicly shall be disclosed on the newspapers and websites appointed by the CSRC. The targeted bonds shall have the contents and means of continuous information disclosure stipulated in the prospectuses, and the said contents and means shall comply with the related regulations of the CSRC on the information disclosure of targeted bonds. The prospectuses and relevant materials shall not be published on the media in direct or disguised form. 

Q: What contents shall the prospectuses have? 

A: The prospectuses shall disclose the specific and clear issue terms, and stipulate in detail the clauses related to the rights and duties of bond-related parties. They shall at least include the following contents: the scale, term and interest rate of the bonds; the starting and terminal time of bond issue; the time, procedure and method of repaying the bond principals and interests; the special bond-repayment accounts and other repayment methods; the relevant arrangements at the bondholders’ meetings; the creditor"s agents and creditor agency agreements; the warranties; the rating reports and the follow-up rating arrangements; the issuers’ liabilities for breach of contracts; the underwriting institutions and their responsibilities.

Q: What contents shall the periodic reports have? 

A: The periodic reports shall disclose in detail the important things related to the bondholders’ interests within the reporting period, and shall at least include the following contents: the repayment of bond principals and interests; the conditions related to the special bond-repayment accounts; the major changes in the guarantors and the guaranteed objects; the changes in the issuers’ liabilities; the comprehensive statements on the cash flows; the follow-up rating work; the main contents of creditor agency reports; the announcements on major events; the convention of bondholders’ meetings; other information having major impacts on the bondholders.

Q: What contents shall the announcements on major events shall have?

A: The issuers shall make the timely announcements or notify the bondholders by effective means if they are found in any of the following situations: it’s expected that the bond principals and interests can’t be repaid on time; some unusual conditions appear in the special repayment accounts; they sign the guarantee contracts or other important contracts that may heavily affect the repayment of principals and interests; they confront the major arbitrations, lawsuits, reduced investments, mergers, separations, dissolutions or applications for bankruptcy; they plan to have the major debt restructuring; they fail to perform the stipulations of the prospectuses; the guarantors and the guaranteed objects have some major changes; the bonds are subjected to the suspended transactions and terminated listing by the stock exchanges; other conditions as prescribed by the CSRC. 

Q: What are the supporting measures or provisions of the Interim Measures?

A: The relevant supporting measures or provisions mainly include the Measures on Administration of the Credit Rating Institutions Engaged in the Securities Credit Rating Business, No.20 Guidelines on the Information Disclosure Contents and Format of the Companies Publicly Issuing the Securities ----- the Application Documents of the Securities Companies for Issuing Bonds, No.21 Guidelines on the Information Disclosure Contents and Format of the Companies Publicly Issuing the Securities -----the Prospectuses of the Securities Companies Publicly Issuing the Bonds, No.22 Guidelines on the Information Disclosure Contents and Format of the Companies Publicly Issuing the Securities -----the Bonds Listing Announcements of the Securities Companies, the Guidelines on Information Disclosure of the Targeted Bond Issue of the Securities Companies, and the Guidelines on the Credit Rating Reports of Securities Company Bonds Issued by the Credit Rating Institutions.

Besides, as far as the targeted bonds of securities companies are concerned, their registration, settlement regulations and administrative measures on transfer and on the secondary bond issue are being studied and formulated.

Q: How does the CSRC treat the further expansion of financing channels for securities companies?

A: Currently, the financing channels of securities companies are quite narrow as a whole. In an aim to provide the necessary conditions for healthy development of the securities companies and market, the CSRC will assist the parties concerned to take some positive measures as the supervisions is strengthened and the risk is controlled so as to further expand the financing channels of securities companies.

The China Securities Regulatory Commission

(This English version by Shenzhen Securities Information Co., Ltd. is for your reference only. In case any discrepancy exists between the Chinese and English context, the Chinese version shall prevail.)