During China’s 2018 National People’s Congress (NPC) and the National Committee of the Chinese People’s Political Consultative Conference (CPPCC) (also known as the “two sessions”), representatives from the financial regulatory authorities mentioned several times that Chinese securities market is ready to create several financial tools or carry out efficient mechanisms aiming at attracting overseas-listed Chinese unicorn companies to return.
On 30 March 2018, the Notice of the General Office of the State Council on Forwarding Several Opinions of the China Securities Regulatory Commission on Conducting the Pilot Program of Innovative Enterprises’ Issuance of Stocks or Depository Receipts within the Territory of China (the Notice) was issued; and the Chinese Depositary Receipt (CDR) soon became an important topic for this year’s reform of the Chinese securities market.
As defined by the Notice, CDRs are securities on the basis of overseas shares issued in China by a depositary and represent the equity of offshore securities. Actually, CDR is a conception similar to the American Depositary Receipt (ADR), aiming to allow eligible non-Chinese companies to indirectly issue securities in China. Since foreign private issuers could not directly issue shares in the US, the ADR facility was firstly carried out to solve this dilemma in 1927. Learning from the Notice, as the pioneer of rules, the ADR is an important reference for CDR. Thus, for the primary understanding of CDR, we may first go through how ADR works.
In essence, the Notice can be considered as a policy guide. Specific supporting rules for CDR shall be further made by the Chinese Securities Regulatory Commission (CSRC) in accordance with Securities Law of the People’s Republic of China (PRC) and the Notice, such as the legal nature of CDR and the regarding legal relationships, the specific requirements, and methods of conversion between CDRs and basic securities. But at least for the moment, we can learn from the Notice that only enterprises from certain industries may benefit from the implementation of CDR. And for careful consideration, the CSRC will set up an industrial advisory committee on scientific and technological innovation to make preliminary qualification review on the CDR issuing applicants. In short, very strict entry restriction is imposed on CDR applicants.
The introduction of CDR will be a big step for the further internationalization of Chinese securities market, which also can be considered as a “shortcut” for Chinese unicorn companies listed overseas to return to the A-share market, without the requirement of delisting and VIE structure removing.
This is the reason why CDR is so expectable by Chinese securities market. As the Notice is only a policy guideline, more detailed implementation rules of CDR need to be further stipulated by CSRC and legal modification shall also be made to keep the sound operation of CDR facility. Undoubtedly, the issuance of specific CDR rules is a challenging project for Chinese rule-makers, but the meaning of CDR to China securities market make it worthy.
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Mr. Arthur Chen – EY Law