In May of 2012, the Shanghai and Shenzhen stock exchanges issued the Tentative Measures for Small and Medium-Sized Enterprise Bond Placements, marking the formal launch of the pilot projects. The term “small and medium-sized enterprise bond placement” means the non-public offering and transfer of corporate bonds, the principal of which and the interest on which is to be repaid within a set period of time, by micro, small and medium-sized enterprises (SMEs) in China.
Convenient and efficient
SME bond placements are a convenient and efficient financing method in terms of approval turnaround times, terms and overall financing costs. The size of the placements can exceed 40% of net assets and there are no hard requirements in respect of the provision of security or ratings. Accordingly, they are the preferred option of numerous SMEs requiring financing.
Legal framework: (1) the Tentative Measures for Small and Medium-Sized Enterprise Bond Placements issued by the Shanghai and Shenzhen stock exchanges; (2) the Guidelines of the Shanghai Stock Exchange for Bond Placements by Small and Medium-Sized Enterprises (for Trial Implementation) and the Guidelines of the Shenzhen Stock Exchange for the Pilot Projects for Bond Placements by Small and Medium-Sized Enterprises; (3) Announcement on the Recordal of Small and Medium-Sized Enterprise Bond Placements (No. 1 and No. 2) issued by the Shanghai Stock Exchange; (4) the Implementing Rules for Registration and Settlement in Connection with the Pilot Projects for Bond Placements by Small and Medium-Sized Enterprises; (5) the Tentative Measures for the Underwriting of Small and Medium-Sized Enterprise Bond Placements by Securities Companies and the Notice on Professional Assessments of Tentative Implementation Plans for the Underwriting of Small and Medium-Sized Enterprise Bond Placements by Securities Companies.
Qualified issuers: micro, small and medium-sized enterprises that are not listed on the Shanghai or Shenzhen stock exchange, and that satisfy the provisions of the Notice on the Issuance of the Regulations for the Criteria for Categorising Small and Medium-Sized Enterprises, and excluding real estate and financial enterprises.
Conditions for the recordal of placements: the issuer is a valid existing limited liability company or joint stock limited company; the coupon rate is not to exceed three times the benchmark rate for bank loans of an equivalent term; the term of a placement is at least one year; the provincial-level people’s government or the relevant authority of the provincial-level government of the place where the issuer is located has executed a co-operation memorandum with the Shanghai and/or Shenzhen stock exchange(s); and the Shanghai Stock Exchange also requires the issuer to have an express plan for repaying the principal and paying the interest.
Underwriter: the underwriting implementation plan of the securities company that is to act as underwriter is required to pass a professional assessment by the Securities Association of China.
Qualified investors: qualified investors include institutional investors and individual investors, and the total number of investors for each tranche of a bond placement may not exceed 200.
Institutional investors are required to be: financial institutions, including commercial banks and securities, trust, insurance and fund management companies, as well as wealth management products offered to investors by the abovementioned financial institutions; enterprises with legal personality with registered capital of not less than RMB10 million (US$1.6 million); partnerships, the partners of which have subscribed for total capital contributions of not less than RMB50 million, and that have total paid-in capital contributions of not less than RMB10 million; and other qualified investors recognised by the Shanghai or Shenzhen stock exchange.
Individual investors may be directors, supervisors and senior management personnel of the issuer and shareholders that hold more than 5% of its shares. In addition, the Shanghai Stock Exchange recognises as qualified investors individuals who have total financial assets of not less than RMB5 million in their names, have records of securities trading in at least the past two years, and who understand and accept the risks of placed bonds.
- Conducting legal due diligence of the issuer, fully understanding and disclosing information on the relevant entities and other aspects of the issuer, and laying a sound foundation for the legal opinion.
- Assisting the issuer in drafting or reviewing the resolution of the company’s highest authority (e.g. shareholders’ general meeting, board of directors) on the placement to ensure that the placement procedure complies with the law.
- Drafting or reviewing the agreement for accepting management of placed bonds to be executed between the issuer and a bond manager engaged by the issuer. The agreement provides for such things as the rights and obligations of the parties, the duties of the bond manager, the remuneration for such management, the replacement of the manager, breach of contract and relief.
- Drafting or reviewing the rules for the bondholders’ meeting, which are to provide for such things as the scope of authority of, and the procedures for convening, the bondholders’ meeting.
- Drafting or reviewing the security contract or letter of guarantee.
- Reviewing the prospectus.
- Issuing a legal opinion that includes an assessment of the prospectus and reviews the following matters: the qualifications of the issuer, the substantive conditions for the placement, the approvals and authorisations for the placement, the agreement for accepting management of placed bonds, the rules for the bondholders’ meeting, the qualifications of the security provider, the letter of guarantee or the security contract (if any), the review of the investor protection mechanism, the arrangement for the disclosure of information by the issuer, and the qualifications of the intermediary firms involved in the placement.
It should be noted that the Shanghai Stock Exchange requires lawyers in their legal opinion to particularly express a clear investigation opinion on such things as the payment of taxes by the issuer, internal and external security provided by the issuer and its guarantor (if any), and mortgages or pledges of their assets, as well as the determination of the issuer’s industry.