Shanghai-London Stock Connect launches

On 17 June 2019, the China Securities Regulatory Commission (CSRC) and the Financial Conduct Authority of the United Kingdom (FCA) released a joint announcement of their approval in principle of the establishment of the Shanghai-London Stock Connect. On the same day, the London Stock Exchange (LSE) held the launch ceremony for the westbound business of Shanghai-London Stock Connect and the listing of Global Depositary Receipts (GDRs) issued by Huatai Securities (Huatai), a company listed on both the Shanghai Stock Exchange (SSE) and Stock Exchange of Hong Kong (SEHK). Huatai is the first A+H share company issuing GDRs on the LSE.

WHAT’S THE CONNECT?

Shanghai-London Stock Connect is a mechanism that connects the LSE and the SSE. Eligible companies listed on the two stock exchanges can issue, list and trade depositary receipts on the counterpart’s stock market in accordance with the corresponding laws and regulations.

The Shanghai-London Stock Connect is a two-way mechanism with westbound and eastbound business.

Westbound business. Under the westbound business, eligible companies listed on the SSE (SSE listed companies) can issue GDRs and apply for their listing on the main market of the LSE.

Eastbound business. Under the eastbound business, eligible companies listed on the LSE (LSE listed companies) can issue Chinese Depositary Receipts (CDRs) in mainland China and apply for their listing on the main board of the SSE.

SIGNIFICANCE OF THE CONNECT

Issuers can improve their reputation in the counterpart’s stock market. In addition, SSE listed companies can (a) issue GDRs representing both existing and newly issued shares under the westbound business to raise capital, and (b) keep the capital raised in foreign countries and use it directly for foreign investment.

In the early stage of eastbound business, LSE listed companies can only use their existing issued shares (but not newly issued shares) as underlying shares to issue CDRs. Therefore, LSE listed companies cannot use the Shanghai-London Stock Connect as a tool to raise fresh capital in mainland China’s domestic market.

From the perspectives of local investors, Shanghai-London Stock Connect
is a tool to invest in the counterpart’s listed companies.

DIFFERENCES WITH SH-HK

Both Shanghai-London Stock Connect and Shanghai-Hong Kong Stock Connect are stock connect mechanisms, but they differ significantly in several ways (please see the tables A, B and C).

APPROVALS IN MAINLAND CHINA

Westbound business. For westbound business, SSE listed companies that use their existing or newly issued shares as underlying shares to issue and list GDRs overseas must (a) comply with the Chinese Securities Law (Securities Law), the Special Provisions of the State Council on the Overseas Offering and Listing of Shares of Joint Stock Companies (Special Provisions), other laws and regulations and other relevant CSRC provisions on the overseas offering or listing of securities by domestic Chinese companies; and (b) obtain the approval from the CSRC.

Eastbound business. For eastbound business, LSE listed companies that use their existing issued shares as underlying shares to issue CDRs should (a) comply with the Securities Law, several opinions on conducting the Pilot Program of Innovative Enterprises’ Offering of Shares or Depositary Receipts within China (the “CSRC’s Several Opinions”) and the CSRC’s regulations; and (b) submit the application to the CSRC. The SSE examines whether the LSE listed companies can meet the conditions for the listing of CDRs and other matters in accordance with the SSE business rules. The CSRC accepts the application documents filed by the LSE listed companies through the SSE and approves the application of the LSE listed companies. The Public Offering Review Committee will not review further.

REGULATORY REQUIREMENTS

Conditions for westbound business in mainland China. As previously mentioned, SSE listed companies offering GDRs overseas must comply with the Securities Law, the Special Provisions, other laws and regulations, and other relevant provisions of the CSRC on the overseas offering or listing of securities by domestic Chinese companies.

In addition, an SSE listed company shall not use its newly issued shares to issue GDRs under any one of the following situations:

1. The application documents contain false records, misleading statements or material omissions.

2. The rights and interests of the SSE listed company are seriously damaged
by the controlling shareholders or actual controllers and the damage has not
been resolved.

3. The SSE listed company or its subsidiary companies provide a guarantee to outsiders in violation of any regulation and the guarantee has not been cancelled.

4. A current director or senior executive has been given an administrative penalty by the CSRC in the past 36 months or has been publicly condemned by the SSE in the past 12 months.

5. The SSE listed company or any of its directors or senior executives are being investigated by (a) the judicial bodies due to any suspected crime, or (b) the CSRC for any suspected breach of laws or regulations.

6. A certified public accountant has issued an audit report with qualified opinions, adverse opinions, or disclaimer of opinions (Qualified Opinions) on the financial reports for the most recent year and period, except in circumstances where the significant impact of the matters involved in the Qualified Opinions have been resolved or such Qualified Opinions have been made in relation to significant corporate restructuring.

7. Other circumstances which seriously damage the lawful rights and interests of investors or the public.

Conditions for eastbound business in mainland China. The business rules of the Shanghai-London Stock Connect are established in accordance with the CSRC’s Several Opinions, but such requirements are not applicable to LSE listed companies that use their existing issued shares to issue CDRs in mainland China.