Recently, with the approval of the China Securities Regulatory Commission (CSRC), the Shanghai Stock Exchange (SSE) issued the “Notice on Matters Concerning the Red-chip Enterprises Applying for Offering and Listing on the SSE STAR Market” (the “Notice” for short), making relevant arrangements for matters concerning handling of valuation adjustment mechanism (VAM), calculation of total share capital, recognition of rapid growth in operating income and application of delisting indicators, etc. in the process of red-chip companies applying for offering and listing on the SSE STAR Market. The main purpose for releasing the "Notice" is to continue to enhance the inclusiveness and adaptability of relevant institutional arrangements for the SSE STAR Market, to attract more high-quality red-chip sci-tech companies and help the market grow and expand.
The matters regulated in the "Notice" are the common issues faced by red-chip companies concerning their overseas registration and governance structure and operating practices, which have been covered in the review of red-chip companies applying for offering and listing. According to the actual situations of the red-chip enterprises, the "Notice" makes the following four targeted arrangements by drawing on overseas market practices in offering and listing of red-chip companies in accordance with relevant provisions in the review and listing rules for the SSE STAR Market:
First of all, for terms widely adopted in the VAM such as issuing preferred shares with special rights to investors, it is stipulated that if investors promise not to exercise relevant rights during the application and issuance, the preferred shares can be retained until they are converted into ordinary shares before listing, and the converted shares will not be regarded as “newly acquired shares”, providing more inclusiveness for the treatment of VAM.
Secondly, regarding the small scale of statutory share capital and low face share value of the red-chip companies, it is stipulated that when provisions concerning the "total share capital" in the conditions for listing on the SSE STAR Market are applicable, the total number of the shares after the issuance or the total number of the depositary receipts rather than the total amount shall be used for calculation.
Thirdly, with regard to principle requirement of “rapid growth in operating income” in the relevant conditions for the domestic offering and listing of red-chip enterprises, three specific criteria have been set up in the aspects of operating income, compound growth rate and peer comparison, and it is only necessary to meet one of the three criteria; it is also stipulated that the above-mentioned “rapid growth in operating income” requirements are not applicable to "the red-chip enterprises in the R&D stage and the red-chip enterprises of great significance to the national innovation-driven development strategy", in order to give full play to the role of the SSE STAR Market in prioritizing the support for the enterprises of hard and core technology.
Fourthly, for red-chip companies with face value denominated in US dollars, Hong Kong dollars and other foreign currencies, it is stipulated that when the "face value-based delisting" indicator is applied, the standard of "closing share price lower than RMB1 in 20 consecutive trading days" shall apply. In addition, the “number of shareholders-based” delisting indicator does not apply to red-chip enterprises issuing depository receipts because of the special attributes of depository receipts.
The "Notice", together with the requirements made by the CSRC earlier such as lowering conditions for domestic offering and listing of listed red-chip companies and handling of matters concerning the use of foreign exchanges by red-chip companies with agreement-control structure in issuing shares or by red-chip enterprises yet to be listed overseas in reducing the stock shares domestically, has further complemented and refined the supporting system directly related to the return of red-chip enterprises for domestic issuance and listing, and linked up the “last kilometer” for the domestic issuance and listing of red-chip companies, and will help red-chip enterprises to make better use of domestic capital markets including the SSE STAR Market.