Switzerland attracts listings of GDRs by Chinese companies
China's securities markets are still more tightly regulated than those in most developed countries. China is, however, implementing a series of policies to open its financial markets. The latest example is the amendment to the London-Shanghai Stock Connect Program ("China Stock Connect Program"). On 11 February 2022, the China Securities Regulatory Commission (CSRC) issued new provisions on the supervision and administration of depository receipts under the China Stock Connect Program, effective with immediate effect. The China Stock Connect Program was expanded to now include companies listed on the Shenzhen Stock Exchange ("SZSE"), as well as Swiss and German stock exchanges. The expansion is intended to enable companies listed in China to more efficiently raise capital in Switzerland and vice versa. From the perspective of the Swiss stock exchange (which is the focus of this article), the amendments will allow companies listed in China to list and trade global depositary receipts ("GDRs") on the SIX Swiss Exchange ("SIX").
As a response to the amendments to the Chinese capital market's policy, it recently became public knowledge that a few mainland China-listed companies, including heavy machinery maker Sany Heavy Industry, Lepu Medical Technology (Beijing) and battery maker Gotion High-Tech, are seeking fundraising at SIX through the listing of GDRs.
Which Securities can be traded through the China Stock Connect Program?
The objective of the revised Chinese regulations on the supervision and administration of depository receipts is to regulate the offering, trading, cross-border conversion, information disclosure, and other activities in relation to depositary receipts under the stock connect scheme between China's and overseas stock exchanges while maintaining an appropriate degree of investor protection. The China Stock Connect Program enables trading of depository receipts through designated local brokers. Companies listed on the Shanghai Stock Exchange ("SSE") or the SZSE can list GDRs on the Swiss stock exchange and companies listed on the Swiss stock exchange can list Chinese depository receipts on the SSE and the SZSE, respectively. This means that the China Stock Connect Program involves a mechanism that connects the capital pools that exist at the involved stock exchanges via a two-way depositary receipt program.
What is a GDR?
GDRs are tradable certificates that are issued to represent deposited equity securities. They allow membership and property rights attached to the deposited equity securities to be exercised indirectly. The underlying equity securities are deposited with a depository, whereby arrangements with the depository need to ensure that the GDR holders can exercise the membership and property rights attached to the underlying equity securities. Thus, in simple terms, GDRs are financial instruments which allow trading for investors.
Standard for GDRs at SIX Swiss Exchange
The listing rules ("LR") of the SIX Exchange Regulation ("SER") – the self-regulatory supervisory body for issuers listed at SIX – provide for a specific segment (designated as regulatory standard) for GDRs. This means that GDRs can be listed on SIX.
Depositary receipts have mainly been used in the form of American depository receipts ("ADRs") by non-US companies to access the US financial markets. The standard for GDRs at SIX, however, enables non-Swiss companies to access the Swiss market. This standard becomes particularly relevant when for certain reasons (e.g. due to technical issues or local law restrictions) they are not able to list their shares directly. Due to the revised Chinese securities regulations, mainland China-listed companies can now benefit from this specific regulatory standard by issuing and listing GDRs on SIX to raise capital in Switzerland more efficiently.
(a) Requirements for the Issuer
The main requirements that must be fulfilled by the issuer of the deposited equity securities (e.g. the Chinese company) are the same as for the main market segment, in particular:
- Track record: The issuer must have a company track record of at least three years.
- Recognized accounting standard: Issuers of GDRs must have applied one of the following recognized accounting standards for the last three years: IFRS, US GAAP or – in the case of foreign issuers - Accounting Standards for Business Enterprises (ASBE) or EU-IFRS.
- Auditors and audit report: Issuers of GDRs must comply with the general listing requirements regarding the licensing of its auditors (article 13 LR) and compliance of its audit reports (article 14 LR).
- Minimum equity: The reported equity capital of the issuer on the first trading day must amount to at least CHF 25 million in accordance with the applicable financial reporting standard.
(b) Requirements for the Depository
The depository must either (a) be licensed as a bank under the Swiss Banking Act or, as a securities firm under the Financial Institutions Act or (b) be subject to equivalent foreign supervision.
(c) Requirements for GDRs
For the GDRs the same requirements apply as for the main market, in particular:
- Legal validity: At the time of listing, the GDRs must have been issued in accordance with the law to which the depositary is subject and must satisfy the provisions that apply to those GDRs. The form of those GDRs must also comply with the law that applies to both the GDRs and the depository.
- Listing by class: The listing must comprise all of the issued GDRs in the same category.
- Free float: The free float requirement only applies to the individual category of the GDRs to be listed. Hence, not the underlying shares but the GDRs must have an adequate free float at the time of listing. The free float is regarded as adequate if at least 20% of all of the issuer's outstanding GDRs in the same category are in public ownership. In addition, the issuer must prove that the capitalisation of the free float amounts to at least CHF 25 million on the first trading day.
- Tradeability: The GDRs must be properly tradeable on SIX, and the issuer has to establish rules on the legal ownership for the GDRs.
- Denominations: The denominations forming the total value of a GDR must enable an exchange transaction in the amount of one round lot.
- Clearing and settlement: The issuer must ensure that transactions can be cleared and settled via the settlement systems that are permitted by SIX.
- Paying agents: As the corporate actions and payments are channelled through the depository, the depository and not the issuer must ensure that services pertaining to dividends, as well as all other corporate actions, are provided through the applicable settlement systems.
- Listing in the home country: SIX's intention is to avoid the listing of GDRs if this is being done only because the issuer does not fulfil its local investor protection regulations. Therefore, GDRs from a Chinese (or any other foreign) issuer for which the underlying shares are neither listed on the stock exchange where the issuer has its registered office nor in the state in which the majority of shares are held, may only be listed in Switzerland if there is confirmation that the absence of listings in these states is not due to non-fulfilment of investor protection regulations.
As a general rule and subject to certain exemptions and relaxations for selected issuers and financial instruments, the Financial Services Act ("FinSA") provides that any person who makes a public offer for the acquisition of securities in Switzerland or who seeks the admission of securities to trading on a trading venue (i.e. a stock exchange or a multilateral trading facility) in Switzerland must first publish a prospectus which has been approved by a reviewing body. The reviewing body checks if the prospectus is complete, coherent and understandable.
The LR provide that an issuer who applies for a listing at SIX must submit evidence that it has a prospectus that has been approved by a reviewing body (e.g. SER) or that is deemed to be approved in accordance with the FinSA (unless an exemption applies). There are no GDR specific exemptions from the prospectus requirement. Hence, the listing of GDRs on SIX is, as a rule, subject to the prospectus requirement.
Exemptions for Secondary Listings
Usually, foreign listed companies seek a secondary listing of their shares on SIX rather than a listing of GDRs. Currently, no GDRs are listed on SIX. The main reason is that the SER regulations provide for several exemptions for the secondary listing of equity securities of foreign companies if the equity securities of the foreign issuer are already listed on another exchange recognized by SIX. For secondary listings in particular the following exemptions apply:
- The requirements that apply under the LR to issuers are considered to be fulfilled with respect to the foreign listed issuer. The only exception applies in respect to the auditors, which have to comply with the LR requirements.
- The free float requirement is fulfilled if the capitalisation of the equity securities circulating in Switzerland is at least CHF 10 million, or if the applying foreign company can otherwise demonstrate that there is a genuine market for the equity securities.
In addition, a foreign issuer is not required to publish a prospectus if it is seeking admission to trading of equity securities that are already admitted to trading on a foreign recognized trading venue. The SSE and the SZSE are such recognized trading venues. This means that the listing process for Chinese issuers already listed on one of these stock exchanges would be substantially facilitated in the case of a secondary listing of shares on SIX. However, due to the high regulatory requirements in China, such secondary listings currently seem to be impracticable for Chinese listed companies.
Since only GDRs are the subject of the expanded China Stock Connect Program, it is to be expected that Chinese listed companies will not take the traditional path of secondary listings and seek fundraising at SIX through the listing of GDRs instead.
Regulatory Requirements for maintaining Listing
As a consequence of a GDR listing, general requirements for maintaining the listing apply, in particular, financial reporting, ad hoc publicity and other capital market requirements (such as prohibitions on insider trading and market manipulation). The current LR, however, provide for the following considerable relaxations for issuers of GDRs: (i) Management transactions do not need to be disclosed, (ii) the interim financial statements do not need to be published and (iii) the SIX Directive on Information Relating to Corporate Governance is not applicable and thus, it is unclear under the current SER regulations which information has to be published in the annual report of an issuer of GDRs.
The revisions of the Chinese provisions on the supervision and administration of depository receipts under the Stock Connect Program between Chinese and overseas stock exchanges has further opened China's financial markets. These recent revisions enable Chinese listed companies facilitated access to the Swiss stock exchange and are expected to reduce the barriers for foreign investors to invest in mainland China-listed companies. This expansion of the stock trading link has already had an effect as it was recently revealed that a few major Chinese companies are interested in seeking GDR listings on SIX. The SER regulations for such GDR listings in Switzerland are in good shape although clarifications regarding certain requirements to maintain the listing would be desirable. Further, the listing process for Chinese companies seeking a listing on SIX would be easier if Chinese regulations were opened wider to make also secondary listings of shares in Switzerland practicable. This means that even though the expansion of the China Connect Program seems to be a considerable step which attracts Chinese companies to list GDRs in Switzerland, there is still room to open China's financial markets even further.