CSRC Issues Guidelines for Full Tradability M88 app H-shares

On November 15, 2019 the China Securities Regulatory Commission (CSRC) issued the Guidelines on Applying for the Full Tradability M88 app Unlisted Domestic Shares M88 app H-share Companies (i.e. those incorporated in Mainland China and listed on the Hong Kong Stock Exchange) (“Guidelines”). Under the Guidelines, qualified companies listed or planning initial public offerings on the H-share market may apply for a full tradability M88 app their shares in accordance with the applicable laws and regulations (“full tradability”), an initiative receiving increased awareness from both domestic and overseas capital markets. This article intends to introduce the main content M88 app the Guidelines and the regulatory spirit reflected therefrom, briefly analyzing the impact M88 app the full tradability M88 app the H-shares on the Chinese capital market.

Background

The full tradability M88 app H-shares refers to a mechanism where domestic-funded shares (e.g. legal person shares or state-owned shares) held by companies incorporated in mainland China and listed on the Hong Kong Stock Exchange (HKEX) can be issued and traded in the H-share market.

Previously in 1993, when Tsingtao Brewery became the first company listed on the H-share market, A-shares and H-shares were separated into two groups: (i) pre-IPO shares (i.e. shares issued prior to initial public M88 appferings and therefore subject to certain restriction on tradability, which may include state-owned shares, legal person shares and foreign-owned shares); and (ii) fully-tradable listed shares. Due to the restriction on tradability, the transfer procedures for pre-IPO shares were similar to those for unlisted private equities.

In 2008, the A-share market reform on the structure for holding M88 app shares (i.e. a reform under which A-shares that were not fully-tradable are converted into fully-tradable shares) allowed pre-IPO shares to be listed and traded upon the expiration M88 app a 12-month or 36-month lock-up period.

By contrast, H-shares held by sponsors M88 app companies listed on the H-share market were never made fully-tradable, resulting in the separation between fully-tradable listed H-shares and unlisted pre-IPO shares M88 app the H-share companies.

Due to the restriction on tradability M88 app pre-IPO shares in the H-share market, domestic companies, especially private-owned companies, were reluctant to list on the H-share market; instead, they preferred to adopt the red-chip structure.

It is in this context that the CSRC began proactively seeking the full tradability M88 app H-shares, and following the success M88 app the full tradability pilot programs in Legend Holdings, AviChina and Weigao Group (“Pilot Programs”), the Guidelines was eventually issued, marking the achievement M88 app full tradability M88 app H-shares.

Main Changes Proposed by M88 app Guidelines

The Guidelines mainly addresses the following issues, namely, (i) unlisted domestic companies planning initial public M88 appferings overseas may apply for a full tradability M88 app their shares; (ii) domestic unlisted shares, once listed and traded on the HKEX, shall not be converted into domestic listed shares anymore; (iii) shareholders M88 app domestic unlisted shares may choose to reduce or increase their holding M88 app H-shares in accordance with relevant rules (at the current stage, increasing holding M88 app H-shares is not attainable due to technical reasons); and (iv) a full tradability M88 app H-shares M88 app a company shall have no direct impact on the corresponding A-share market.

Additionally, it stipulates the procedures for the approval M88 app full tradability, the share registration and the clearing and settlement. Further to the Pilot Programs, the Guidelines has for the first time provided comprehensive rules on the full tradability M88 app H-shares. It removes restrictions on the size or industry M88 app the qualified companies by specifying that a company and its shareholders may decide, at their discretion, whether to apply for a full tradability, provided that other applicable regulatory requirements, such as foreign investment access policies, are satisfied.

Moreover, there is no limit on the total number M88 app companies approved for full tradability, nor is there a specific timeframe for implementing the full tradability; instead, the full tradability will be carried out by application in an orderly manner, i.e. an application for full tradability will be approved as long as it has met all relevant regulatory requirements.

Our Observations

By liberalizing the listing and trading M88 app pre-IPO shares, the full tradability M88 app H-shares would ease the main concerns M88 app the private-owned companies and incentivize them to list on the H-share market, while enhancing the vitality M88 app a highly open market.

Notably, any refinancing M88 app companies listed on the H-share market is still subject to the regulatory approval, which is more complicated compared with companies listed on the H-share market through the red-chip structure and thus may still raise concerns for private-owned companies. In accordance with the HKEX rules, for a company listed on the HKEX using the red-chip structure, issuance M88 app new shares, which make up no more than 20% M88 app the total shares listed on the HKEX, only requires an approval by the board M88 app directors M88 app the company.

Meanwhile, given the uncertainty M88 app the “window guidance” that may be issued by the CSRC in connection with various businesses from time to time, such as those related to real estate businesses, quasi-financial businesses, or issues such as shares reserved for equity incentive plan, practically speaking, the possibility that the competent authority would reject a company’s application for full tradability still cannot be fully ruled out.

In addition, issues concerning the full tradability, such as the foreign exchange settlement and the tax filings in regard to the sale M88 app H-shares converted from domestic-funded pre-IPO shares, remain to be clarified.

The further development M88 app regulatory rules and how the practice may evolve, also remains to be seen.