Equity capital markets in China: regulatory overview

A Q&A guide to equity capital markets law in China.

The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.

To compare answers across multiple jurisdictions visit the Equity capital markets country Q&A tool.

This Q&A is part of the global guide to equity capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/equitycapitalmarkets-guide.

Contents

Main equity markets/exchanges

1. What are the main equity markets/exchanges in your jurisdiction? Outline the main market activity and deals in the past year.

Main equity markets/exchanges

The Shanghai Stock Exchange (SSE) (www.sse.com.cn), which includes the Main Board, is aimed at larger size enterprises (in terms of share capital or asset value).

The Shenzhen Stock Exchange (SZSE) (www.szse.cn) includes the:

  • Main Board which is aimed at larger size enterprises.

  • Small-Medium Enterprise (SME) Board which is aimed at middle sized enterprises.

  • Growing Enterprise (GE) Board which is aimed at smaller enterprises, fast-growing enterprises and innovative enterprises.

The National Equities Exchange and Quotations (NEEQ) (www.neeq.com.cn) is a platform for trading the shares of non-listed companies.

The Main Board of the SSE, the SME Board and the GE Board all have financial standards for listing, and the standards for the Main Board and SME Board are higher than those for the GE Board. The NEEQ does not have any earnings or profitability requirement.

Currently, foreign entities are not permitted to be listed on the SSE, the SZSE or the NEEQ.

Market activity and deals

The main market activities include:

  • IPOs.

  • Secondary offerings.

  • Mergers and acquisitions (M&A).

  • Material asset restructurings involving listed companies.

Major deals included:

  • Guotai Junan Securities Co, Ltd: IPO and listed on the SSE (Stock Code: 601211), raising CNY29.63 billion and constituting the largest IPO in 2015.

  • CNR merged with CSR and renamed as CRRC Corporation Limited (Stock Code: 601766).

 
2. What are the main regulators and legislation that applies to the equity markets/exchanges in your jurisdiction?

Regulatory bodies

The main regulatory bodies are as follows:

  • China Securities Regulatory Commission (CSRC).

  • Shanghai Stock Exchange.

  • Shenzhen Stock Exchange.

  • National SME Share Transfer System Co Ltd.

Legislative framework

The main pieces of legislation that apply to the equity markets and exchanges are as follows:

  • Company Law.

  • Securities Law.

  • Administrative Measures for Non-Listed Public Corporations.

  • Measures for the Administration of Initial Public Offerings and Listing of Stocks.

  • Administrative Measures for Initial Public Offerings and Listing on the GE Board.

  • Securities Offering and Underwriting Regulations.

  • Measures for the Administration of the Takeover of Listed Companies.

  • Administrative Measures for the Material Asset Reorganisations of Listed Companies.

  • Listing rules and the trading rules issued by the respective stock exchanges.

 

Equity offerings

3. What are the main requirements for a primary listing on the main markets/exchanges?

Main requirements

The main requirements for a primary listing on the main stock exchanges are as follows:

  • The issuer prepares the application documents.

  • The sponsor files the application to the China Securities Regulatory Commission (CSRC).

  • The CSRC approves the application.

  • The stock of the issuer is admitted to be listed on the relevant stock exchange.

Minimum size requirements

The shareholders' equity before issuance must be over CNY30 million for listing on both Main Boards of the Shanghai or Shenzhen Stock Exchanges and the SME Board of the Shenzhen Stock Exchange.

To list on the GE Board, the shareholders' equity after issuance must be over CNY30 million.

Trading record and accounts

For listing on the Main Boards of the Shanghai or Shenzhen Stock Exchanges and the SME Board of the Shenzhen Stock Exchange, the company must have been operating for minimum period of three years, and over the latest three fiscal years:

  • The net profit for each of the last three years must be positive, and the accumulative net profit must be over CNY30 million (in determining the net profit, exceptional or non-recurrent income must be excluded).

  • The accumulative operating cash flow must be over CNY50 million, or the accumulative revenue must be over CNY300 million for the same period.

  • The ratio of intangible assets value (excluding land use rights, water aquaculture rights and mining rights) to net assets value is not more than 20% at the end of the latest financial period.

  • The company must not have any uncovered losses at the end of the latest financial period.

For listing on the GE Board of the Shenzhen Stock Exchange, the company must have been in operation for at least three years, and either:

  • Over the latest two fiscal years, the accumulative net profit must be over CNY10 million, or over the latest fiscal year, the net profit is positive with an operating income of no less than CNY50 million with a consecutive growth (in determining the net profit, exceptional or non-recurrent income must be excluded).

  • At the end of the latest financial period, the net assets value is no less than CNY20 million and there are no uncovered losses.

Minimum shares in public hands

At least 25% of listed shares must be in public hands. However, where the total share capital is over CNY400 million, the minimum percentage will be lowered to 10%.

 
4. What are the main requirements for a secondary listing on the main markets/exchanges?

Main requirements

These are the same as for a primary listing (see Question 3).

Minimum size requirements

These are the same as for a primary listing (see Question 3).

Trading record and accounts

These are the same as for a primary listing (see Question 3).

Minimum shares in public hands

These are the same as for a primary listing (see Question 3).

 
5. What are the main ways of structuring an IPO?

A straightforward IPO can be conducted once the application for listing has been approved by the China Securities Regulatory Commission and the issuer is admitted by the relevant stock exchange. The process is governed by the Measures for the Administration of Initial Public Offerings and Listing of Stocks.

Another way of structuring an IPO is by conducting a back-door listing through a reverse takeover (that is, where a listed shell company offers shares through a private placement to purchase the issuer's assets). The process is governed by the Administrative Measures for the Material Asset Reorganisations of Listed Companies, but it must also meet the standards as stipulated in the Measures for the Administration of Initial Public Offerings and Listing of Stocks.

 
6. What are the main ways of structuring a subsequent equity offering?

A subsequent equity offering can be structured as:

  • A public offering (including share placements to existing shareholders, a public offering of shares, and a public issuance of convertible bonds).

  • A non-public offering of shares.

 
7. What are the advantages and disadvantages of rights issues/other types of follow on equity offerings?

With an IPO, the sponsor, legal counsel and accountants must conduct due diligence, tutoring and sponsoring for the issuer, and the offering must be approved by the China Securities Regulatory Commission and be admitted to be listed on the relevant stock exchange.

A private placement by a listed company is aimed at targeted investors. Documents will be prepared by a financial adviser and legal counsel. This process is both easier and shorter than the process required for an IPO.

 
8. What are the main steps for a company applying for a primary listing of its shares? Is the procedure different for a foreign company and is a foreign company likely to seek a listing for shares or depositary receipts?

Procedure for a primary listing

The main steps for a company applying for a primary listing of its shares are as follows:

  • The issuer prepares the relevant materials required for the application for listing.

  • The sponsor files the application for listing to the China Securities Regulatory Commission (CSRC).

  • The CSRC grants its approval for listing.

  • The issuer applies to be listed on the relevant stock exchange.

  • The issuer is admitted to trading on the relevant stock exchange.

  • Capital verification and change of registration with the administration of industry and commerce.

Procedure for a foreign company

At present, Chinese stock exchanges are not available to foreign companies for both primary and secondary listings.

 

Advisers: equity offering

9. Outline the role of advisers used and main documents produced in an equity offering. Does it differ for an IPO?

Sponsors, as the co-ordinators of an IPO project, are responsible for:

  • Co-ordinating other advisers in preparation for the IPO.

  • Tutoring the issuer on the procedures for an IPO.

  • Filing application materials.

  • Assisting the approval process.

  • Underwriting the offering.

The main documents in an IPO include:

  • Prospectus.

  • Listing sponsor letter.

Legal counsel conducts due diligence on the issuer and issues its legal opinion. The main documents include:

  • Legal work report.

  • Legal opinion.

Accountants are responsible for auditing the issuer's financial reports and verifying the financial data. The main documents include:

  • Financial statements and auditing report.

  • Earnings projection report.

  • Internal control report.

  • Non-recurrent profit and loss table (verified by the Chinese Institute of Certified Public Accountants (CICPA).

 

Equity prospectus/main offering document

10. When is a prospectus (or other main offering document) required? What are the main publication, regulatory filing or delivery requirements?

Prospectus (or other main offering document) required

A prospectus is required when the issuer applies to make an offer to the public and on an application for admission to trading on one of the stock exchanges.

Main publication, regulatory filing or delivery requirements

The application documents must meet the minimum requirements as stipulated in the Application Document Catalogue of Initial Public Offering, and be prepared in accordance with the format and order as required by the China Securities Regulatory Commission (CSRC). After the application documents are approved by the CSRC and admitted by the stock exchange, the issuer can then offer shares to public investors and raise funds according to the terms in the application documents.

 
11. What are the main exemptions from the requirements for publication or delivery of a prospectus (or other main offering document)?

There are no exemptions from the requirement to provide a prospectus together with the application documents for an IPO.

If the issuer chooses to conduct a back-door listing (that is, where a listed shell company offers shares through a private placement to purchase the issuer's assets), no application documents for an IPO are required. The documents that are required and the process are governed by the Administrative Measures for the Material Asset Reorganisations of Listed Companies.

 
12. What are the main content or disclosure requirements for a prospectus (or other main offering document)? What main categories of information are included?

The main content requirements for the prospectus are as follows:

  • Summary of the offering.

  • Statement of the issuer.

  • Risk factors.

  • Information about the issuer's business and technology.

  • Facts about the issuer.

  • Affiliate competition and related-party transactions.

  • Board members, executive officers and supervisors.

  • The issuer's corporate governance.

  • The issuer's financial statements.

  • The issuer's management discussions and analysis.

  • The issuer's business development strategies.

  • The issuer's use of proceeds.

  • The issuer's dividend policy.

  • Other important factors.

The disclosed information must be true, accurate and complete, and must not be misleading.

The prospectus is divided into:

  • Legal information.

  • Financial information.

  • Business information.

Financial information can cite the financial statement and auditing report. Financial statements include the:

  • Balance sheet.

  • Income statement.

  • Statement of cash flows.

The auditing report must be unqualified.

 
13. How is the prospectus (or other main offering document) prepared? Who is responsible and/or may be liable for its contents?

The prospectus is prepared by the issuer after the due diligence review by the sponsor, the legal adviser and the accountants.

The following are all responsible for the truthfulness, accuracy and completeness of the information disclosed in the prospectus:

  • Issuer's controlling shareholder.

  • Issuer's actual controlling person.

  • Board members.

  • Executive officers.

  • Supervisors.

  • Sponsor.

  • Legal adviser.

  • Accountant.

This responsibility includes civil, administrative and criminal liability.

 

Marketing equity offerings

14. How are offered equity securities marketed?

Equity offering documents (including the prospectus) must be disclosed in the newspaper and website designated by the China Securities Regulatory Commission. The publication of the information in the newspaper and on the website will indicate important information, including, among other things:

  • The equity subscription method.

  • The subscription duration.

  • The subscription price.

The issuer and the underwriter then conclude an underwriting agreement. The listed shares will be sold by the sponsor, which is also always the underwriter.

 
15. Outline any potential liability for publishing research reports by participating brokers/dealers and ways used to avoid such liability.

The underwriter will issue the study report for the sale of the securities, which must not include any false information or any other information that may mislead the investors.

If there is any breach of the rules concerning the publication of research reports, the China Securities Regulatory Commission can:

  • Order the underwriter to correct any errors.

  • Issue a warning to the underwriter.

  • Confiscate any illegal gains received.

  • Impose a fine.

  • Suspend or revoke related business licences.

 

Bookbuilding

16. Is the bookbuilding procedure used and in what circumstances? How is any related retail offer dealt with? How are orders confirmed?

The prospectus or the offering documents can state that the pricing of the IPO will be determined by the result of a price consultation. The qualified offline institutional and individual investors can decide whether or not to make an offer (quotation), and the underwriter cannot refuse the offer without a rational reason for that refusal.

The quotation of the offline investors must include the price per share and the number of the shares to be subscribed.

During a price consultation, the issuer and the underwriter will disregard the highest and lowest of the quotations and will fix the price based on the remaining quotations. The quotations that are disregarded must not constitute more than 10% of all the offline investors.

Once the price of the IPO has been finalised, the investors that offered valid quotations will then have the right to participate in the subscription.

 

Underwriting: equity offering

17. How is the underwriting for an equity offering typically structured? What are the key terms of the underwriting agreement and what is a typical underwriting fee and/or commission?

There are two ways to structure a share issuance:

  • Underwriting.

  • Consignment.

A share issuance must be structured by way of an underwriting group when the book value of all shares to be subscribed is over CNY50 million.

The issuer and the underwriter will conclude an underwriting agreement, which must state the rights and obligations of both parties and the number of shares to be underwritten. In the case of an underwriting, the agreement must state the responsibility of the underwriter. In the case of a consignment, the measures to be taken if the issuance fails must be agreed.

Underwriting fees are generally dependent on the size of the IPO.

 

Timetable: equity offerings

18. What is the timetable for a typical equity offering? Does it differ for an IPO?

Generally speaking, the timetable for an IPO is as follows:

  • Three months from corporate restructuring to the establishment of a company limited by shares.

  • Three months to conduct due diligence.

  • Three months for the preparation of the documents required to file an application for listing.

  • Six months to file the application documents and obtain an IPO permit from the China Securities Regulatory Commission.

Only the latter two procedures are usually involved in a non-public offering.

 

Stabilisation

19. Are there rules on price stabilisation and market manipulation in connection with an equity offering?

A listed company must ensure that the share price remains stable, and any manipulation by anyone using any of the following means is prohibited:

  • Where anyone, independently or in collusion with others, manipulates the trading price of securities or the trading quantity of securities by centralising the advantage in respect of funds, shareholding advantage or utilising an information advantage to trade jointly or continuously.

  • Where anyone collaborates with any other person to trade securities in accordance with a pre-determined time, price or method, which affects the price or quantity of the securities traded.

  • Where anyone trades securities between the accounts that they control, with the result that the price or quantity of the securities traded is affected.

  • Where anyone manipulates the securities market by any other means.

Anyone who manipulates the security market will be liable for any damages caused to the investors as a result of that manipulation.

 

Tax: equity issues

20. What are the main tax issues when issuing and listing equity securities?

During an IPO, the following tax issues may arise for the issuer:

  • Income tax.

  • Value added tax.

  • Business tax.

  • Stamp duty (in relation to a share transfer).

  • Tax implications of the restructuring of related parties.

  • Tax implications of asset disposals.

 

Continuing obligations

21. What are the main areas of continuing obligations applicable to listed companies and the legislation that applies?

A listed company has continuing information disclosure obligations and must disclose a quarterly report, a mid-term report and an annual report under the laws and regulations:

  • The annual report must be disclosed within four months after the end of each fiscal year, and it must include a financial report audited by an accounting firm with a securities and derivatives related business licence.

  • The mid-term report must be disclosed within two months after the end of the first half of each fiscal year.

  • The quarterly report must be disclosed within one month after the end of March or September.

In the case of a material event, a listed company must also disclose a temporary report about the material event to the China Securities Regulatory Commission and the relevant stock exchange.

A listed company must be kept independent. Any related-party transactions must be compliant with the laws and regulations.

The board members, supervisors, senior management, shareholders who hold more than 5% of the shares, the beneficial controlling party, and any other party which acts in concert with these people, must report a list of related-party transactions to the listed company.

Related-party transactions of a listed company must comply with the correct procedure for related-party transactions, and related shareholders must abstain from voting on related-party transactions.

 
22. Do the continuing obligations apply to listed foreign companies and to issuers of depositary receipts?

Not applicable.

 
23. What are the penalties for breaching the continuing obligations?

Where there is a breach of the information disclosure requirements that the issuer must disclose as part of the continuing obligations, the China Securities Regulatory Commission (CSRC) can take the following measures against the issuer:

  • Issue an order to correct.

  • Conduct a supervisory talk.

  • Issue a letter of warning.

  • Publicly identify the infringer.

  • Identify the infringer as an inappropriate person.

  • Take any other regulatory measures it considers appropriate.

Where the CSRC suspects that a crime has been committed as a result of a failure to comply with the continuing obligations, it can provide the judicial authorities with evidence of that suspected crime.

 

Market abuse and insider dealing

24. What are the restrictions on market abuse and insider dealing?

Restrictions on market abuse/insider dealing

It is strictly prohibited for an insider, or any other party who has illegal access to insider information, to conduct securities trading (insider trading).

An insider of a listed company, or any other party who has illegal access to insider information, is prohibited from buying or selling the shares of that listed company, or from disclosing the insider information or suggesting that a third party buy or sell the shares of that listed company.

Where damages are caused to investors as a result of insider trading, the insider(s) committing the insider trading are liable for those damages.

Penalties for market abuse/insider dealing

The following penalties can be imposed on an insider found guilty of committing insider trading:

  • Disposal of the illegally held securities.

  • Confiscation of any illegal gains.

  • Imposition of a fine of one to five times the value of the illegal proceeds.

  • If the insider trading was conducted by a legal entity, the principal can be warned and also be fined between CNY30,000 to CNY300,000.

Where a person involved with the securities regulatory body conducts insider trading, they will be subject to even greater penalties.

 

De-listing

25. When can a company be de-listed?

De-listing

A listed company can file the application for de-listing from the market, or it can be forced to de-list from the market, when the requirement for listing cannot be meet.

A listed company can apply for de-listing in the following scenarios:

  • There is a resolution by the shareholders' meeting to either:

    • file an application for de-listing; or

    • move to another security exchange for trading.

  • There is a redemption of shares which has the result that the number of shares, or the share structure, cannot meet the listing requirement.

  • There is a dissolution of the company caused by a merger of the business.

  • There is a dissolution of the company as a result of a resolution by the shareholders' meeting.

A listed company can be forced to de-list if it fails to meet the listing requirements, including the requirements concerning:

  • Net profit, net assets, operating income or type of audit opinion.

  • Disclosure mechanisms.

  • Volume of share trade.

  • Closing price.

  • Share structure.

  • Forced dissolution.

  • Bankruptcy decided by the court.

Suspensions

A listed company can be forced to be suspended when the conditions for suspension are met and it fails to meet the listing requirements, including the requirements concerning:

  • Net profit, net assets, operating income or type of audit opinion.

  • Disclosure mechanisms.

  • Share volume.

  • Share structure.

  • Fraud offering.

 

Reform

26. Are there any proposals for reform of equity capital markets/exchanges? Are these proposals likely to come into force and, if so, when?

Led by the China Securities Regulatory Commission (CSRC), the Chinese capital market is currently undergoing reform which is aimed at encouraging the following:

  • Allowing the security exchange to be the reviewing body of a public offering, ensuring that any review will pay attention to the fact that there is true, adequate and full information disclosure.

  • Making the CSRC responsible for registration, ensuring that it can give more attention to the investigation of securities crime and unlawful information disclosure.

The National Equities Exchange and Quotations (NEEQ) was intended to promote multi-zone supervision. The general theory that overrides this is "multi-level, more steps".

The NEEQ will be constituted by multi-leveled markets, and different levels of market will be open to different companies.

NEEQ companies are currently divided by creative level and basis level. The division of the related levels of NEEQ companies may well be optimised or adjusted in the future with the development of the market.

 

Online resources

China Securities Regulatory Commission (CSRC)

W www.csrc.gov.cn/pub/csrc_en/laws/

Description. The official website maintained and updated by the CSRC. The English translations of statutes are for guidance only.



Contributor profile

Kejun Guo, Partner

Zhong Lun Law Firm

T +86 10 5957 2082
F +86 6568 1838
E guokejun@zhonglun.com
W www.zhonglun.com/cn/index.aspx

Professional qualifications. PRC and New York, Lawyer

Areas of practice. M&A; capital markets; private equity

Non-professional qualifications. Master of Law, Peking University; Bachelor of Economy, Renmin University; LLM degree, US (full scholarship sponsored by Sohman Scholarship).

Recent transactions

Mr Guo has a high level of proficiency in English and an in-depth knowledge of the laws on corporates and on securities. He has handled a number of large M&A, reorganisation and financing projects. His clients are mostly heavyweight firms operating in a wide range of industry sectors, including energy, medicine, petrochemistry, securities, fund, automobile, and insurance.

Professional associations/memberships.

  • Independent director for two listed companies.
  • Adjunct professor of Renmin University.
  • Standing Council of China Venture Capital & Private Equity Association.
  • Council of Zhong Lun Charity Foundation.

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