By posting the China Securities Regulatory Commission’s (CSRC) Guidelines for the Application by H-Share Companies for “Full Tradability” of Their Domestic Unlisted Shares, and also the CSRC responses to questions by the press on the comprehensive roll-out of the H-share full tradability reform on its official website on 15 November 2019, the CSRC has announced that the H-share full tradability system is being rolled out on a comprehensive basis. The main details of the H-share full tradability policy follow:
Who it applies to, and basic conditions. H-share companies (including companies proposing to offer H shares) may apply for the listing and trading of their domestic shares and unlisted foreign shares on the HKEx.
An H-share company applying for full tradability of its H shares is required to satisfy the following conditions: (1) comply with laws and policy requirements concerning access by foreign investors, administration of state-owned assets, national security and industrial policy; and (2) have compliant corporate governance and lawful, compliant and practicable internal decision-making procedures, such that they can ensure shareholders’ right to know, right to participate and right to vote.
Internal decision-making and approval requirements. An H-share company applying for full tradability is required to carry out internal decision-making procedures in accordance with the provisions of such laws and company systems as the Company Law, Company Articles of Association, etc.
Whether approval is done through the shareholders’ general meeting/class shareholders’ general meeting depends on the requirements of the corporate governance systems, such as the Company Articles of Association. In terms of approval, an H share company applying for full tradability is required to do so by way of the administrative permission procedure for “approval for an offshore public offering and listing of shares (including additional offering) by a joint stock limited company”.
A company having access requirements in respect of the qualifications of its shareholders that applies for the full tradability of its shares is required to secure the prior consent of the industry regulator. Applications for full tradability by state-controlled companies or those involving state-owned shares are required to comply with regulations on the supervision and administration of state-owned equity.
The author’s analysis of the fine points of the H-share full tradability policy follows:
- Respecting practical experience and leveraging the market’s role. The H-share full tradability policy promotes accuracy and improvement in share classification, provides that the tradability of unlisted shares may be applied for together with an initial offering, or additional offering, or applied for separately with flexible timing, sets out the provisions on the approvals by the CSRC and industry regulators, and provides the concise and optimized CSRC list of application materials that takes into account the features of full tradability matters;
- The path of H-share full tradability is smooth, which increases the attractiveness of a H-share listing model. H-share listing avoids the trouble of cross-border restructuring for overseas listing, compared with a red-chip model listing. When Chinese domestic enterprises successfully list in HKEx, they can choose to issue A shares in the China stock market or apply for H-share full tradability of the unlisted shares, due to the smooth path of H-share full tradability, so the intention of their shares to trade freely can be realized. Compared with H-share listing, the attractiveness of the red-chip model is dropping, and an increasing number of Chinese enterprises will opt for the H-share model and list in Hong Kong;
- Concise H-share full tradability application documents and enhancement of regulatory services;
- Stimulation of Hong Kong market activity, potentially creating a liquidity crunch in the Hong Kong market in the short term. In the long term, the size of the Hong Kong market will increase and market activity will rise, making the Hong Kong market more attractive to international investors and mainland enterprises; and
- Limited impact on the Chinese market. As the H share full tradability reform is limited to companies that only have H shares and are listed on the Hong Kong market, and is affected by numerous factors such as administration of state-owned assets, control maintenance and market valuation, it will only have a minor impact on the mainland market.
In the author’s opinion, H-share full tradability has some shortcomings.
Ignoring the “3+H” rules and creating a blind spot in system convergence. The H-share full tradability policy makes no mention of full tradability of the domestic shares of “3+H” companies. From the H-share full tradability policy’s ignoring of the 3+H company and New Third Board reform-related business rules, it can be seen that the policy is limited to H shares only, making effective convergence with the multi-tiered capital market on the mainland impossible.
Lack of reasonable basis for requiring submission of official reply concerning management of state-owned equity structure when applying for full tradability of H shares. According to the application document list, a state-controlled H-share company applying for full tradability is required to submit official reply documents concerning management of its state-owned equity structure and the conversion of state-owned shares into offshore listed shares.
However, after many years of policy evolution, the system basis for an official reply concerning management of state-owned equity structure when a H-share company lists has changed, and H-share companies are no longer required to submit such official replies when carrying out an IPO or additional offering. Accordingly, the requirement for the submission of such an official reply for H-share full tradability is unreasonable. Accordingly, the author would recommend the following policy changes:
Convergence with a multi-tiered capital market system and attention to the evolution of market system rules. The H-share full tradability policy needs to consider 3+H companies in policy formulation, set out clear provisions on system convergence, and further simplify the full tradability approval procedure for 3+H companies.
Abolition of requirement for an official reply on management of the state-owned equity structure. The requirement in the H-share full tradability policy for the submission of an official reply on management of the state-owned equity structure is devoid of a system basis, and is inconsistent with the CSRC’s requirements for H-share IPO and additional offering documents. Accordingly, the author would recommend the removal of such an official reply from the application documents for H-share full tradability.
Fan Xingcheng is a senior partner at Dentons.
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