Listing Global Depositary Receipts in London

By Zhou Liang and Gu Jun

Chinese enterprises need to comply with relevant laws and regulations in China, the UK, and the European Union.

I n September 2015, China and the UK launched a feasibility study for a link between the Shanghai and London stock exchanges. That tieup became a reality on June 17, 2019 when the China Securities Regulatory Commission (CSRC) and the Financial Conduct Authority of the United Kingdom (FCA) announced the creation of the Shanghai-London Stock Connect program. On the same day, Huatai Securities, one of China's largest brokerages, made its trading debut on the London Stock Exchange (LSE), becoming the first company to trade via the new link.

The Shanghai-London Stock Connect is a mechanism that connects the London and Shanghai stock exchanges, and the initial stage of the program covered what is known as the westbound business. This allowed eligible companies listed on the Shanghai Stock Exchange (SSE) to issue Global Depositary Receipts (GDRs) and apply for their listing on the Main Market of the LSE. The UK's Admission and Disclosure Standards provides that, to take part in the business, enterprises must comply with the laws and regulations of the FCA and the LSE as well as those in China. Additionally, rules set by the European Union need to be obeyed.

Procedure for GDR Issuance

The issuance of GDRs on the London Stock Exchange by enterprises from China should follow these steps:

Firstly, Chinese corporate issuers give underlying securities of the GDRs to a depositary.

Next, the depositary deposits the issuer's shares in a custodian bank.

Thirdly, the depositary and a broker help the Chinese enterprise issue GDRs.

Then, the custodian collects the money paid by investors for purchasing the GDRs.

Lastly, the custodian remits the money to the Chinese enterprise.

Qualifications for GDR Listing

According to the Admission and Disclosure Standards and Listing Rules in the UK, as well as the relevant laws and regulations by the European Union, a Chinese company seeking admission into the LSE must meet the following requirements:

Be legally registered or validly established in other ways in accordance with Chinese laws, and operate in keeping with articles of the laws.

Have published a prospectus approved by the FCA.

Obtain an FCA-approved application to admit depositary receipts to the Official List.

Have underlying shares listed on the Main Board of the SSE.

Be approved by the CSRC.

Have a minimum market capitalization of 20 billion yuan.

If the company lists on the LSE, its directors and senior managers should abide by a number of restrictions on securities trading.

It can be concluded that the qualifications are aimed at attracting high-quality Chinese companies. There are 260 Shanghai-listed companies that are eligible to list securities in London via Stock Connect, according to the UK Treasury. Chinese banks and financial institutions which are in the early stage of internationalization, as well as leading enterprises in niche industries, are expected to be the main issuers of GDRs.

Criteria for UK Cross-border Conversion Institutions

The Shanghai-London Stock Connect uses Designated Brokers (referred to as “cross-border conversion institutions” in the SSE and the CSRC rules) to enable the cross-border trading of GDRs. As provided in Article 27 of the Guidelines for the Cross-Border Conversion of Depositary Receipts under the Stock Connect Scheme between Shanghai Stock Exchange and London Stock Exchange by the SSE, any overseas securities institution intending to apply to the SSE to become a UK cross-border conversion institution shall:

Be willing and able to comply with the regulatory requirements and relevant rules of the SSE.

Have the corresponding capability to both exchange renminbi into foreign currencies and exchange foreign currencies into renminbi.

Depending on Article 82 of the Interim Measures for the Listing and Trading of Depositary Receipts under the Stock Connect Scheme between the Shanghai Stock Exchange and the London Stock Exchange, the institution also shall

Be a full member firm of the LSE.

Be a Qualified Foreign Institutional Investor (QFII) or a RMB Qualified Foreign Institutional Investor (RQFII) itself or have an entity that it controls, by which it is controlled, or with which it is under common control that is a QFII or RQFII, except as otherwise prescribed by the SSE. It must also be financially robust and have a good credit standing and a significant asset size.

Have in place a sound governance structure and well-developed internal control rules, run a compliant operation, and not have received any major sanctions from a regulatory authority in the most recent three years.

Meet any other requirements deemed necessary by the SSE.

Cross-border conversion institutions provide interconnections for dealings between the Shanghai and London stock exchanges, subject to restrictions set by China and the UK. Examples of the restrictions include a cap on the total of GDRs determined by the CSRC. In addition, the total of cross-border funds in the Shanghai-London Stock Connect westward business shall not exceed 300 billion yuan. And the UK cross-border conversion institutions can hold no more than 500 million yuan in cash and specific investment products in China.

Seven securities institutions have been approved by the SSE as UK cross-border conversion institutions since December 4, 2018. These are China International Capital Corporation (UK) Limited, ICBC Standard Bank PLC, JP Morgan Securities PLC, CLSA (UK), Haitong International (UK) Limited, Barclays Bank PLC, and HSBC Bank PLC.

Rules on GDR Underlying Securities Issuance

Rules to be obeyed when China's domestic listed companies issue GDRs with underlying securities mainly include the Provisions on the Supervision and Administration of Depositary Receipts under the Stock Connect Scheme between the Shanghai Stock Exchange and the London Stock Exchange (for trial implementation) released by the CSRC and the UK Listing Authority (UKLA) in its Listing Rules.

The CSRC regulatory provisions allow domestic listed companies to issue GDRs based on either new stocks issued or existing stocks on the SSE, on condition that they accord with China's relevant regulations on overseas issuance or listing of securities by Chinese enterprises. However, there are some situations in which the issuance of GDRs on the basis of newly-issued stocks is not allowed:

(1) The application documents for the current offering contain any misrepresentations, misleading statements or major omissions.

(2) The rights and interests of the listed company are severely impaired by its controlling shareholder or actual controller, and the impairment has not been relieved.

(3) The listed company or its subsidiary company has illegally provided external guarantees, and the guarantee has not been discharged.

(4) Incumbent board directors or senior executives of the listed company have received administrative penalties from the CSRC in the latest 36 months or have been criticized publicly by the stock exchange in the latest 12months.

(5) The listed company or its incumbent board directors and senior executives are under ongoing investigations by judicial agencies for suspected criminal offenses, or under ongoing investigations by the CSRC for suspected violations of laws or regulations.

(6) The listed company's financial statements for the most recent year or the most recent reporting period are given a qualified opinion, adverse opinion, or disclaimer of opinion by the auditors, unless the major consequences of the issues indicated by the said opinions have been completely relieved or unless the current issuance involves material asset restructuring.

(7) Other circumstances that impose severe damages to the lawful rights and interests of the investors, and social and public interests.

The CSRC regulation also stipulates GDR pricing guidelines. It provides that for domestic listed companies which issues GDRs on the basis of newly-issued shares, the offering price of GDRs, after pro-rata conversion, shall in principle not be lower than 90% of the average price of the underlying stocks over the 20 transaction days prior to the benchmark date of pricing.

The benchmark date of pricing prescribed in the preceding paragraph is the date of the announcement of a public offering of GDRs. This is to prevent improper transactions with arbitrage activities, an effort to protect the rights and interests of both Chinese issuers and overseas investors.

In the aspects of the UK's regulation, Chinese companies should meet the Standard Listing Criteria to issue GDRs with underlying securities on the Main Board of the LSE. According to the Listing Rules, securities must:

Conform with the law of the applicant's place of incorporation.

Be duly authorized according to the requirements of the applicant's constitution.

Have any necessary statutory or other consents.

Be freely transferable.

Be fully paid and free from all liens and from any restriction on the right of transfer.

Additionally, 25% of the certificates for which application for admission has been made should be in public hands no later than the date of approval for listing.

Once a company is admitted, it becomes subject to the continuing obligations including information disclosure, annual report compilation, and notification of major issues.

Continuing Obligations for GDR Issuers

Of the above-mentioned obligations, the ongoing information disclosure is the most important. Considering that there may be a large time difference between the place of the issuers and the UK, as well as differences in regulatory rules, it is essential for an enterprise to disclose information within the trading period.

As for annual report compilation, companies are required to publish unaudited semi-annual reports within three months after the end of the first half of the financial year, and the audited annual reports within four months after the end of the financial year. Moreover, if the company lists on the LSE, its directors and senior managers should abide by some restrictions on securities trading. This requirement is to avoid the insider-dealing in the international bond market.