Access to capital for Chinese businesses through London listings

By Michael Wang and Nikolas Colbridge, Dentons
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Launched in June 2019, the Shanghai-London Stock Connect scheme is a reciprocal arrangement between the Shanghai Stock Exchange (SSE) and London Stock Exchange (LSE) that allows Chinese entities with A Shares listed on the SSE to list global depositary receipts (GDRs) representing such A shares on the LSE, and LSE-listed companies to list Chinese depositary receipts (CDRs) on the SSE. The reciprocal arrangements may be characterised as Westbound listings (for PRC entities seeking listings in London) and Eastbound listings (for UK listed entities seeking listings in Shanghai).

Westbound listings

London
Michael Wang
Partner
Dentons

One of the key innovations of the Shanghai-London Stock Connect is that it allows investors in the UK to trade A shares (in the manner described below) which, prior to the Shanghai-London Stock Connect was not possible, other than in very limited circumstances.

A key feature that distinguishes the Shanghai-London Stock Connect from the Hong Kong Stock Connect is the ability of the PRC issuer to raise primary capital through the London listing (in contrast to Hong Kong, where the platform supports secondary trading only). This innovation allows PRC companies to raise RMB from outside the PRC, which may be ear-marked for any overseas acquisition or investment strategy of its group. Contrast this with an SSE-listed company attempting to roll out its overseas investment strategy that must comply with exchange control restrictions to implement any transaction settled in a currency other than RMB.

The Westbound Shanghai-London Stock Connect is reserved for blue-chip issuers, and to be eligible to list in London the PRC issuer must have a minimum market capitalisation on the SSE of RMB20 billion (US$2.9 billion).

London
Nikolas Colbridge
Partner
Dentons

The UK process is familiar for practitioners used to dealing with GDR listings for overseas entities. The creation of the GDRs is pursuant to contract (a depositary agreement), entered into between the PRC entity and the depositary bank under the PRC Contract Law, and their listing is pursuant to the UK Listing Rules and the EU’s Prospectus Regulation.

The GDRs are admitted to listing on the standard listing segment of the UK Listing Authority official list, and to trading on the Shanghai segment of the main market of the LSE, which is an EU regulated market. Once listed, the PRC entity is subject to ongoing requirements as with any overseas issuer with GDRs listed in London, while at the same complying with its ongoing obligations under PRC law.

The Shanghai-London Stock Connect uses designated brokers to enable the cross-border trading of GDRs and the underlying A Shares. Designated brokers ensure the fungibility of the scheme as they are authorised to deal in securities via the stock connect in both jurisdictions.

One of the features of the stock connect is that there is a single pool of liquidity relating to A Shares in which investors (overseas or Chinese) can trade. Investors will be able to: (1) buy GDRs by requesting a designated broker to buy A Shares on the stock connect and instructing their depositary to create GDRs representing such A Shares; and (2) sell GDRs by requesting a designated broker to redeem their GDRs and sell the underling A Shares on the SSE.

Eastbound listings

The Shanghai-London Stock Connect provides an opportunity for PRC investors to invest in companies listed on the LSE, which was previously not possible, other than in very limited circumstances.

An investment threshold is set in order to protect an orderly market. Therefore, any PRC-based individual investor who wishes to trade CDRs must satisfy the following requirements: (1) the daily average value of assets in the investors’ securities account and funds account over the 20 trading days before applying for trading CDRs must be no less than RMB3 million (excluding any funds and securities acquired from margin trading and short-selling transactions); (2) the investor must have no record of a serious breach of personal integrity; and (3) the investor must not be prohibited or restricted from trading securities by the provisions of Chinese law, the market rules of the SSE, or for any other reason.

Eligible companies listed on the LSE can issue CDRs on the Main Board of the SSE.

In order to list CDRs in Shanghai, issuers must: (1) have a minimum market capitalisation of RMB20 billion; (2) be listed on the LSE for at least three years, with a minimum of one year on the premium segment of the main market; (3) issue a minimum of 50 million units of CDRs representing RMB500 million worth of underlying shares; (4) hold or acquire sufficient underlying shares (new capital raising is not permitted for CDRs); and (5) obtain permission from the China Securities Regulatory Commission (CSRC) and comply with Shanghai Stock Exchange requirements.

An important commercial consideration when considering whether to issue CDRs is that LSE-listed companies are not permitted to directly raise funds on the SSE through the issuance of CDRs linked to new shares. Only CDRs representing existing shares can be issued on the Main Board of SSE.

CDRs will be treated like domestic Chinese A Shares and will be fungible with the underlying share in London. They will be traded during Chinese trading hours by Chinese investors, with clearing and settlement taking place in the China Securities Depository and Clearing Corporation system.

Due to the differences in laws, languages and cultures between the PRC and the UK, and in order to improve the efficiency of communication and supervision, overseas issuers are required to establish securities affairs institutions within China. They must: (1) employ domestic representatives who are familiar with PRC rules and requirements to be responsible for information disclosure and regulatory liaison during the listing of the CDRs; (2) set up channels for effective communication with investors, regulators and the SSE; and (3) protect the legitimate rights and interests of domestic investors.

The stock connect has the potential to create a vibrant UK-China financial ecosystem, and therefore potential issuers and investors have taken a keen interest in it. The stock connect undoubtedly has potential, however, based as it is to the two countries’ mutual advantage.

Chinese companies now have increased access to Europe’s major capital market, and LSE-listed companies to the world’s major growth economy. Whatever the vagaries of the moment, these fundamentals do not seem likely to change.

Michael Wang and Nikolas Colbridge are partners at Dentons. Dentons’ partner Willow Wei, associate Ben Lloyd and trainee associate Zeng Haixuan also contributed to this article.

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