ChiNext lifts its regulatory game

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More than 300 listed companies have been trading on ChiNext since its successful launch on 23 October, 2009. To gradually improve the regulatory regime for companies listed on ChiNext, the securities regulators and the Shenzhen Stock Exchange have, based on the existing laws and regulations, made timely amendments and introduced an array of documents and policies to address the following issues.

A photo of The Shenzhen Stock Exchange
The Shenzhen Stock Exchange

Memorandum No. 1 on Information Disclosure Operations on ChiNext – Use of Over-raised Funds was revised in April 2010 to specifically govern the scope of applicability of over-raised funds of companies listed on ChiNext, the purposes of use of such funds, procedures for the use of such funds and deposit of such funds. This memorandum has elaborated on the requirements for the disclosure of information on the use of over-raised funds at different stages.

The imposition of strict restrictions on the use of over-raised funds by companies listed on ChiNext will help effectively minimise the risks created during the use of such funds.

Shares held by management

The Shenzhen Stock Exchange issued the Notice for Further Regulating the Trading in the Shares of Companies Listed on ChiNext by the Directors, Supervisors and Senior Management Members of Such Companies in November 2010 to extend the lock-up period for requiring directors, supervisors and senior management members of companies to continue holding shares after leaving office within a year of completion of the listing of their companies, and to encourage making additional extension to the lock-up period and setting a minimum price for the sale of such management shares.

Wayne Chen
Wayne Chen

Sponsors are required to pay close attention to any change in position of management personnel, to further ensure they fulfil their commitments and verify whether the trading and circulation of shares with selling restrictions are in compliance with regulations. These measures are to strengthen the supervision of the trading of the shares of companies by directors, supervisors and senior management members, to help maintain stable management teams and to contribute to the long-term development of companies.

Improved sanction mechanism

The Shenzhen Stock Exchange published the Criteria for Issuing Public Censures against Companies Listed on ChiNext in April 2011, setting clear criteria for making public the reprimanding of companies listed on ChiNext, in particular the criteria for publicly reprimanding companies for irregularities regarding the disclosure of information on material events, disclosure in periodic reports, occupation of funds, provision of guarantees and management of raised funds. These requirements aim to enhance the regulatory deterrent capability and further improve the mechanisms for imposing penalties for breaches by listed companies and carrying out enforcement of self-regulation.

The Shenzhen Stock Exchange implemented the Guidelines on a Through-Train Pilot Scheme for Information Disclosure by Listed Companies in October 2011, to strengthen its mechanism for information disclosure by listed companies. The Shenzhen Stock Exchange Measures for Evaluating Information Disclosure by Listed Companies, revised in November 2011, requires the quantitative evaluation of information disclosure by listed companies.

Monica Gao
Monica Gao

Notice No. 41 published by the China Securities Regulatory Commission (CSRC) in December 2011, and Memorandum No. 10 on Information Disclosure Operations on ChiNext – Disclosure of Annual Reports published by the Shenzhen Stock Exchange, published in January 2012, have laid down more detailed requirements for various sections disclosed in the annual reports of companies listed on ChiNext, such as management discussion and analysis and distribution of profits. in addition, listed companies are required to specify various policies in their articles of association, such as the method of profit distribution and the specific conditions for declaring cash dividends and their proportion.

The Rules Governing the Listing of Shares on the Shenzhen Stock Exchange’s ChiNext as amended recently have increased the information disclosure obligations of listed companies, requiring them to disclose all relevant matters during the processing of fund-raising projects. Also, listed companies with negative net assets are required to issue forecasts of their operation achievements.

Improved delisting mechanism

The amended Rules Governing the Listing of Shares on the Shenzhen Stock Exchange’s ChiNext formally introduced a delisting regime for ChiNext under which:

  • the particulars relating to the suspension and termination of a listing are revised;
  • the criteria and the basis for determining resumption of a listing, as well as the application for resumption of a listing, are specified;
  • the policy for handling a warning about a delisting risk is abolished, and specific requirements are set for disclosure of risks associated with the suspension and termination of a listing under different situations;
  • the policy for a delisting consolidation period is introduced and a delisting consolidation board is set up;
  • the whereabouts of companies listed on ChiNext following their delisting are made clear.

In addition to the documents and policies mentioned, the Shenzhen Stock Exchange has also issued various regulatory policies such as the Notice for a Trial System for Maintaining Ongoing Supervisory Specialists in Certain Sponsors and the Shenzhen Stock Exchange Measures for Filing for the Record by Independent Directors. In the past two years, Chinese securities regulators and the Shenzhen Stock Exchange have established an increasingly sound regulatory regime governing companies listed on ChiNext in aspects including the use of raised funds, information disclosure, management’s shareholding and the setup of a delisting mechanism, offering a solid foundation for the sustainable development of ChiNext.

Wayne Chen is a partner at Llinks Law Offices in Shanghai. He can be contacted at + 86 21 3135 8666 or by email at way.chen@llinkslaw.com

Monica Gao is a lawyer at Llinks Law Offices in Beijing. She can be contacted at + 86 10 6655 5050 or by email at monica.gao@llinkslaw.com