GDR under the Shanghai-London Stock Connect mechanism

By Frank Qu, Dentons

At 8am London time on 17 June 2019, the China Securities Regulatory Commission (CSRC) and the Financial Conduct Authority (FCA) made a joint announcement, approving the creation of Shanghai-London Stock Connect between the Shanghai Stock Exchange (SSE) and the London Stock Exchange (LSE), thereby officially launching Shanghai-London Stock Connect.

Huatai Securities was the first Chinese company to list and have its depository receipts trade on the LSE. China Pacific Insurance (Group) has also indicated an interest in listing on the LSE by offering depository receipts, which are securities having a foreign security underlying them issued in one country, and representing interests in the underlying foreign security.

Frank Qu
Senior partner

Depending on where a depository receipt is issued or traded, it is prefixed with different words, for example, global depository receipts (GDR), Chinese depository receipts (CDR), American depository receipts (ADR), and European depository receipts (EDR).

The Shanghai-London Stock Connect is an interconnection between the SSE and LSE stock markets, and includes Eastbound and Westbound business. Eastbound business means the public offering of depository receipts in China and listing of the same on the SSE by a qualified underlying foreign security issuer listed on the LSE. Westbound business means the offshore offering of depository receipts and listing of the same on the LSE by a qualified domestic listed company listed on the SSE.

The difference between Shanghai-London Stock Connect and Shanghai-Hong Kong Stock Connect is that, under the Shanghai-Hong Kong connect, investors can directly purchase and hold stocks from the counterparty’s market, whereas, under Shanghai-London connect, investors may only indirectly hold stock from the counterparty’s market through depository receipts. Furthermore, issuers in the Shanghai-London Stock Connect may carry out equity financing on one occasion.

Legal provisions on the offering of GDR

Pursuant to the Provisions for the Regulation of the Interconnected Depository Receipt Business Between the Shanghai Stock Exchange and the London Stock Exchange (for Trial Implementation), issued by the CSRC on 12 October 2018, where a domestically listed company uses its newly increased stock as the underlying securities to offer GDR abroad, or uses existing stock as the underlying securities to list GDR abroad, it is required to comply with such laws and regulations as the Securities Law, the Special Provisions of the State Council for the Offering and Listing of Shares Abroad by Joint Stock Limited Companies, etc., and the CSRC regulations for the foreign offering or listing of securities by domestic enterprises.

Where a domestic listed company that uses newly increased stock as the underlying securities to offer GDR abroad to purchase assets, it is additionally required to satisfy the conditions set forth in article 43 of the Administrative Measures for Material Asset Restructurings of Listed Companies.

Additionally, a Chinese domestic A-share listed company that issues and lists GDR on the LSE is required to comply with relevant provisions of the LSE’s Admission and Disclosure Standards.

Review procedure

The offering and listing of GDR under the Shanghai-London Stock Connect must be co-ordinated and matched with the procedures for the offering and listing of the A shares that serve as the underlying securities. The main offering review procedure requires the issuer to apply to the CSRC for a securities offering and foreign listing. After approval by the CSRC, the issuer submits its prospectus to the FCA and applies for its publication.

After approval by the FCA, the issuer applies to China Securities Depository and Clearing Corporation Limited for registration and deposit of the A shares, after pricing of the placement and determination of the size of the offering. Finally, the issuer applies to the SSE for approval of the listing of the A shares while the depositary issues the GDR, and the issuer applies to the LSE for listing of the GDR.

No offering

Pursuant to the regulations for bidirectional oversight of the Shanghai-London Stock Connect, if any of the following circumstances applies to a domestically listed company, it may not use its newly increased stock as underlying securities for a foreign offering of depository receipts if:

(1) The application documents for the contemplated offering contain false or misleading statements or material omissions;

(2) The interests of the listed company have been materially harmed by its controlling shareholder, or actual controller, and the same has not been extinguished;

(3) The listed company and its subsidiaries have committed a violation of regulations in providing security for a third party and the same has not been released;

(4) The incumbent directors or senior executives have been subjected to administrative penalties by the CSRC during the past 36 months, or have been publicly reprimanded by a stock exchange during the past 12 months;

(5) A judicial authority has opened a case and begun an investigation against the listed company, or an incumbent director, or senior executive for suspicion of having committed a criminal offence, or the CSRC has opened a case and begun an investigation against the same for suspicion of having committed a violation of a law or regulation;

(6) A certified public accountant has issued an audit report for the most recent annual and quarterly financial reports with a qualified opinion, an adverse opinion or a disclaimer of opinion, unless the material impact on the matters referred to in the qualified opinion, adverse opinion or disclaimer of opinion have been extinguished, or the contemplated offering involves a material restructuring; or

(7) Another instance of serious harm to the lawful rights and interests of investors or the public interest applies.

Prospects for GDR offerings

The offering of GDR by companies listed in China is conducive to such companies attracting quality investors on a global scale, continuing to improve their corporate governance and steadily expanding their international footprint, thereby further enhancing their global influence.

With the increasing number of domestically listed companies opting for GDR to obtain financing, we are confident that relevant exchange controls, investor protection, information disclosure and other such systems will be further improved, ultimately permitting Chinese enterprises to effectively tap global capital markets.

Frank Qu is a senior partner at Dentons and head of the firm’s China region financial institution practice group


15th/16th Floor, Shanghai Tower
501 Yincheng Road (M), Pudong New Area
Shanghai 200120, China
Tel: +86 21 5878 5888
Fax: +86 21 5878 6866