China Securities Regulatory Commission (“CSRC”), the securities regulator of the People’s Republic China (the “PRC” or “China”), has scrapped quantitative threshold requirements for Chinese companies applying for offshore listings by promulgating new guidelines on December 20, 2012 (the “2012 Guidelines”). The 2012 Guidelines became effective as of January 1, 2013.
Under Chinese securities laws, CSRC is the authorized regulatory authority to approve all offshore listings by PRC incorporated companies. In the past, CSRC had exercised tight control over offshore listing applications and applied relatively onerous qualifications as set out in its July, 1999 circular (the “1999 Circular”). Under the 1999 Circular, a PRC incorporated company seeking to list offshore was required to have net assets of not less than RMB400 million (approximately US$63.6 million), net profit of not less than RMB60 million (approximately US$9.6 million) for the most recent year and a fundraising size of not less than US$50 million based on a reasonably expected price/earnings ratio, in addition to satisfying other requirements. These quantitative requirements were stricter than the listing requirements of many of the offshore stock exchanges Chinese companies typically sought listings on. For example, the main board of The Stock Exchange of Hong Kong Limited (the “SEHK”), which has been the most popular venue for Chinese companies seeking to list offshore, requires only net profit of HK$20 million (approximately US$2.6 million) for the most recent year and an aggregate net profit of HK$30 million (approximately US$3.9 million) for the prior two years under the profit test and even these lower profits thresholds do not apply if the company seeking to list can satisfy either the alternative market capitalization/revenue or market capitalization/cash flow test. SEHK, like many other international stock exchanges, imposes no requirements as to asset size. Due to the relatively onerous requirements of the 1999 Circular, most of the Chinese companies listed on the main board of the SEHK (often referred to as H-share Companies) are asset-heavy State-owned enterprises, with relatively high profits and large fundraising size; and most privately owned Chinese companies, which are typically small or medium-sized enterprises (“SMEs”), are either listed on China’s domestic stock exchanges in Shanghai or Shenzhen, or listed overseas by adopting the so called “small red-chip” structure, in which an offshore holding company is set up to hold the Chinese operations and assets acquired by it, and the listing entities are the offshore holding companies rather than the PRC incorporated operating companies. Following promulgation of the Rules Regarding the Acquisition of Domestic Enterprises by Foreign Investors (????????????????) by MOFCOM and a number of other regulatory authorities (the “Circular 10”) in 2006, implementing the “small red-chip” structure has become costly, time-consuming and, in some cases, difficult or impossible.
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