The DRs Mechanism of Shanghai-London Stock Connect

内容摘要并转引自：锦天诚律所 作者：于炳光

Shanghai-London Stock Connect is the abbreviation for the connectivity mechanism between the Shanghai Stock Exchange (SSE) and the London Stock Exchange (LSE). It refers to the arrangement where eligible companies listed on the two venues can issue depositary receipts (DRs), list and trade them on the other side’s market according to local market’s laws and regulations. Meanwhile, through a cross-border conversion mechanism between depositary receipts and underlying securities, the connectivity of the two markets to be realized.

On March 22, 2018, the General Office of the State Council forwarded the Opinions of the China Securities Regulatory Commission (CSRC) on Launching Pilot Projects for the Domestic Issuance of Shares or Depositary Receipts by Innovative Enterprises, which built up a platform of rules for issuing depositary receipts domestically by Chinese companies, especially for those high-tech innovative enterprises listed overseas.

On June 6, 2018, the CSRC promulgated the Administrative Measures for the Issuance and Trading of Depositary Receipts (for Trial Implementation) and related supporting documents, clarifying the requirements for the issuance, trading and information disclosure of Chinese Depositary Receipts. The promulgation of the aforesaid measures constructively broke through the legal system which forbids foreign companies from listing in mainland China, and this represents a further opening up of China’s capital market.

On July 10, 2018, the LSE announced Consultation on Amendments to the Admission and Disclosure Standards, soliciting advice on the addition of the Shanghai-London Stock Connect Segment and other associated revisions. On September 17, 2018, the LSE issued the amended Admission and Disclosure Standards, adding the Shanghai-London Stock Connect Segment to the Main Market and corresponding issuance and disclosure requirements. The Standards came into effect on October 1, 2018.

On August 31,2018, the CSRC announced the Notice on Public Consultation for 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) and on October 12, issued 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) (referred to as the Supervision and Administration Provisions), providing a legal and institutional basis for the connectivity of the two markets and issuance of depositary receipts.

On October 12, 2018, the SSE published its consultation on the relevant systems of Shanghai-London Stock Connect. These drafts set forth specific provisions on the listing process, cross-border conversion and the market making system for depositary receipts. On November 2,2018, the SSE promulgated the Interim Measures for the Listing and Trading of Depositary Receipts under the Stock Connect Scheme between Shanghai Stock Exchange and London Stock Exchange and other relevant regulations.

In addition to complying with the above-mentioned rules, an SSE-listed company issuing Global Depositary Receipts (GDRs) are still subject to the related requirements of Securities Law and Special Regulations of the State Council Concerning Floating and Listing of Shares Overseas by Companies Limited by Shares, and the relevant rules of the GDR issuance promulgated by the UK securities regulatory authorities, such as Listing Rules and Prospectus Rules promulgated by the Financial Conduct Authority (FCA). Since the UK has not yet left the EU, the issuance of GDRs continues to comply with EU Directives and Regulations, such as the Transparency and Prospectus Directives.

According to the prevailing rules, Shanghai-London Stock Connect includes a two-direction business, eastbound and westbound. The eastbound direction consists of LSE-listed companies listing Chinese Depositary Receipts (CDRs) on the SSE. In the westbound direction, the A-share companies listed on the SSE list Global Depositary Receipts (GDRs) on the LSE. At the initial stage, the underlying securities of the DRs are limited to stocks only. The eastbound direction will not allow LSE-listed companies to conduct direct financing in China’s domestic market by issuing new shares in the form of CDRs at current juncture. The A-share companies listed on the SSE can conduct direct financing in the UK market by issuing GDRs. To steadily promote the issuance of the DRs, limitations will be initially placed on the total volume of depository receipts that can be issued and that of the daily trading volume. Qualified securities trading institutions on both sides may directly open securities and fund accounts in the market of the other side and engage in cross-border depositary receipt conversion business provided they abide by the applicable rules and regulations.

The LSE and the SSE have by now almost completed the formulation of applicable rules and regulations for eligible companies to list DRs on each other’s market. With the launching of the Shanghai-London Stock Connect mechanism, the listed companies in the two countries are already at concert pitch. On September 25,2018, Huatai Securities announced that it will issue GDRs and apply for listing on the LSE. It plans to raise no less than US$500 million for its domestic and overseas business development and investment. Upon the launch of Shanghai-London Stock Connect, Huatai Securities will become the first A-share company to be listed on three venues: Mainland China, Hong Kong and London (A+H+GDR). Apart from Huatai Securities, China’s Bluestar Adisseo is also considering issuing GDRs to raise about US$500 million. According to statistics, there are still about 224 SSE-listed companies eligible for issuing GDRs. Parallelly, LSE-listed companies are also actively preparing, and it is reported that HSBC might become the first foreign company to issue CDRs on the SSE. An optimistic forecast is that the first issuance of DRs under Shanghai-London Stock Connect will take place in early December this year.

Posted from SLPRO Z