Unchained: Refinancing Reform under Registration-Based System

Tag：securities and capital markets-onshore offshore initial public offerings and refinancing

In our previous article, we discussed several significant amendments introduced under the registration-based system concerning IPOs. The full implementation of registration-based system reform has also led to substantial changes in the regulatory framework governing the refinancing of listed companies. Relevant rules include the Administrative Measures of Securities Offering and Registration by Listed Companies (the “New Refinancing Measures”) and the Administrative Measures of the Preferred Shares Pilot Project, both promulgated by the China Securities Regulatory Commission (the “CSRC”); the Rules Governing the Review of Offering and Listing of Securities by Companies Listed on Shanghai Stock Exchange (the “SSE Refinancing Review Rules”), released by the Shanghai Stock Exchange (“SSE”); and the Rules Governing the Review of Offering and Listing of Securities by Companies Listed on Shenzhen Stock Exchange (the “SZSE Refinancing Review Rules”) released by the Shenzhen Stock Exchange (“SZSE”, with SSE, individually referred to as the “Stock Exchange”, or collectively as the “Stock Exchanges”). This article provides an overview of significant amendments in the New Refinancing Measures and other supporting rules related to refinancing.

1. Looking Back – Piloting Registration-Based Refinancing Reform in the ChiNext Market and STAR Market

In mid-2020, a pilot program of registration-based refinancing reform was introduced to the ChiNext Market and STAR Market, stimulating the vitality of the A-share listed companies.

Following the pilot program’s introduction, in 2020, 55 listed companies on the ChiNext Market had proposed raising a total of RMB 48.117 billion after the offering requirement that “the asset-liability ratio at the end of the most recent fiscal period shall not be less than 45%” for convertible corporate bonds was eliminated. Additionally, 91 listed companies proposed raising a total of RMB 92.29 billion since the offering requirement that “has generated positive net income for the past 2 years” for share offering to specific investors was removed. [1]

Under the pilot program, the review time for refinancing of listed companies was significantly shortened. The average review and response time for refinancing applications on the SZSE decreased by nearly 30% compared to 2019, and the review efficiency for refinancing was significantly improved.[2]

The ChiNext Market introduced a simpler procedure for listed companies that intended to raise small amount of capital. Representative cases included refinancing of C&Y Pharm (SZ: 300254) and Wenzhou Hongfeng (SZ: 300283), which only took 8 working days, from the application date to the consent date, to complete the entire application process. These two companies received the refinancing proceeds within 9 working days and 5 working days respectively, showcasing the high efficiency for fund-raising activities under the pilot program. SZSE promulgated 9 guidelines regarding refinancing business and shortened the offering process, so as to provide more clarity and certainty.[3]

The CSRC also explained in the relevant drafting notes that, since the implementation of the pilot program, the main institutional arrangements for refinancing had withstood the market test and met expectations. All market participants had responded positively and the conditions for the full implementation of registration-based system for refinancing of listed companies were mature.[4]

2. Integration of the Regulatory Framework and Offering Procedure

The amendments of the New Refinancing Measures leveraged the experiences gained from the pilot program of the ChiNext Market and STAR Market. The New Refinancing Measures integrated the regulatory framework for refinancing and abolished separate rules that apply to different markets. The corresponding review rules of the SSE and SZSE were amended accordingly, which generally reflected the offering procedure under the registration-based system. The CSRC and the Stock Exchanges also integrated various supplementary rules and guidelines for refinancing into several guidance letters, which are applicable to all markets of SSE and SZSE.

The registration-based system for refinancing was further expanded to the Main Boards of SSE and SZSE. Offering procedures for refinancing were unified across the Main boards, STAR Market and ChiNext Market. It is also specified that the Stock Exchanges will serve as the full-spectrum reviewer, while the CSRC will be the registrar and “fail safe” under the New Refinancing Measures, just as the two bodies were positioned in the IPO process.

Under the New Refinancing Measures, the board of directors of the listed company shall pass a resolution concerning the share offering and submit such resolution to the general meeting of shareholders for approval. The content of such resolution includes: (1) plan for the offering of securities; (2) the feasibility analysis report on the offering plan; (3) the feasibility report on the use of proceeds; and (4) other matters that must be addressed.

In preparing the feasibility analysis report for the securities offering plan, the board of directors shall consider multiple factors, including the relevant industry, the current development phase of the listed company, financial status and planning, capital requirements and other available information. Outside directors of the listed company shall issue special opinions on whether they concur with the feasibility analysis report. The feasibility analysis report shall include: (1) the necessity for the type of securities to be issued; (2) the suitability of the scope, number and standards for the selected investors; (3) the reasonableness of the principles, bases, methods and procedures for determining the offering price; (4) the feasibility of the offering method; (5) the fairness and reasonableness of the offering plan; (6) the impact on diluting existing shareholders' interests or immediate return per share; and (7) specific measures for indemnification to the dilution.

The offering of securities shall be adopted by more than two-thirds of the voting rights represented by the shareholders present at the general meeting, in which the voting results of the minority shareholders shall be separately counted and listed. If the securities are issued to specific shareholders of the listed company and their connected persons, such shareholders shall abstain from voting.

The listed company shall prepare the application documents and submit them to the Stock Exchange. An independent listing review division and listing review committee under the Stock Exchange shall review the application documents and make inquiries to determine (1) whether the listed company satisfies the requisite requirements for offering; and (2) whether the listed company make sufficient disclosures in the application documents.

If it is determined that the listed company is suitable for offering, the Stock Exchange shall make a decision and submit it to the CSRC for registration. Meanwhile the CSRC will simultaneously focus on whether the business of the listed company and the investment project that will utilize the proceeds raised from the offering are in compliance with the national industrial policies and whether the listed company is suitable for offering, considering the corresponding market’s orientation.

Similar to the IPO process, the reporting mechanism between the Stock Exchange and the CSRC for critical incidents was also adopted in refinancing review procedure to strengthen regulatory oversight.

3. Optimization of Offering Requirements under New Refinancing Measures

The offering requirements for the Main Boards listed companies were simplified and optimized, which generally adhered to the requirements of the ChiNext Market and STAR Market. The New Refinancing Measures unified the general requirements for securities offering across all markets. Meanwhile, considering the diversified orientations of different markets, the CSRC customized unique offering requirements that match each market’s characteristics. Most of the offering requirements for the Main Boards listing companies prior to the New Refinancing Measures were diminished or simplified, including but not limited to, the elimination of the requirement on cash dividend distribution, the shifting from profitability to business continuity , the optimization of the business compliance requirement.

As the offering requirements of refinancing for the ChiNext Market and STAR Market after the New Refinancing Measures remained essentially unchanged, tables below briefly summarize amendments to the offering requirements for the Main Boards listed companies:

4. Expansion of the Summary Procedure and Classified Review Mechanism

The summary procedure of the ChiNext Market and STAR Market has significantly enhanced the refinancing efficiency of the listed companies. Statically, as of August 11, 2022, 11 listed companies on the ChiNext market (averaging RMB 4.1 billion in market capitalization, 43 million in net income) chose to utilize the summary procedure and 54 listed companies were on their way to the submission. [6]Such strong preference suggested that Main Boards listed companies would not neglect such a convenient refinancing channel.

(1) Summary Procedure

The general meeting of the shareholders of the listed company may authorize, on an annual basis, the board of directors to issue additional shares to specific investors at its discretion. Proceeds from offering of shares under the summary procedure shall not exceed RMB 300 million and 20% of the net asset of the listed company.

The summary procedure shall not apply in any of the following circumstances:

1) The shares of the listed company are subject to a delisting warning or other risk warning by the Stock Exchange;

2) The listed company and its controlling shareholder, de facto controller, incumbent directors, supervisors or senior management were subject to administrative penalties by the CSRC in the past 3 years, or administrative regulatory measures by the CSRC or disciplinary actions by the Stock Exchange in the past year;

3) The sponsor or sponsor representative, the securities service providers or its relevant signatories were subject to administrative penalties imposed by the CSRC or disciplinary actions imposed by the Stock Exchange for similar business in the past year.

The listed company and its sponsor shall submit application documents to the Stock Exchange within 20 working days after the board of directors has passed the resolution regarding the offering. If the application documents are not submitted within the prescribed time limit, the summary procedure will not apply.

The Stock Exchange shall make a decision on whether to accept the application within 2 working days after receiving the application documents. If the sponsor issues a clear and affirmative review opinion on the offering, the Stock Exchange shall, within 3 working days from the date of acceptance, issue its review opinion stating that the offering requirements and the information disclosure requirements are satisfied, and submit both the review opinion and application documents to the CSRC. The CSRC shall decide whether to consent the registration within 3 working days after receiving the review opinion and relevant materials.

The listed company and the lead sponsor shall submit the offering and underwriting plans and other documents to the Stock Exchange within 2 working days after obtaining the CSRC’s consent of the registration, and complete the payment for the offering within 10 working days or such consent will become invalid.

Compared with the general procedure for share offering, the summary procedure offering is not constrained by the 18-month refinancing interval and the time limit for review under summary procedures is significantly reduced. The registration procedure for summary procedure offering at the CSRC level is also simplified.

However, the convenience and swiftness of summary procedure come at a higher cost. For listed companies using summary procedures, the Stock Exchange will strengthen the ex-post inspection and, for those participants who violate relevant rules regarding the summary procedure, the Stock Exchange will impose stricter sanctions, along with a disciplinary action of not accepting the summary procedure offering application from such listed company or sponsor for 3 to 5 years.

(2) Classified Review Mechanism

The classified review mechanism for offerings to specific investors were introduced to the ChiNext Market and STAR Market. For listed companies that meet the following conditions applying for share offering to specific investors, the listing review division of the Stock Exchange may issue review reports without making review inquiries: (1) the use of proceeds complies with national industrial policies; (2) the information disclosure evaluation results of the listed company are rated “A” in the past 2 years; and (3) the listed company do not have circumstances that would disqualify the listed company from summary procedure.

5. Consolidation of the Responsibilities of All Capital Markets Participants

As mentioned in our previous article, the essence of the registration-based system reform is to “leave the choice to the market, strengthen disciplines from the market and the established rules”. Therefore, the New Refinancing Measures did not relax the quality requirements on listed companies. Instead, it imposed stricter scrutiny on them. Following the full implementation of registration-based System, the Stock Exchanges are responsible for accepting the applications for share offering, the major revisions by the SSE Refinancing Review Rules and SZSE Refinancing Review Rules (Collectively, the “Exchanges Rules”) concerning the division of rights and responsibilities of participants in the capital market are as follows.

(1) Timing for Assuming Responsibilities

According to the Exchanges Rules, the provision that “liability shall be borne upon acceptance of listing application” is adjusted to that “liability shall be borne upon the application by the issuer”, that is, under the Exchange Rules, the listed companies and its controlling shareholder, de facto controller, directors, supervisors, senior management (together, the “Key Participants”), and relevant security service providers shall assume the corresponding legal liability from the date of submission of the application documents for offering.

(2) Specification of the Stock Exchange’s Supervision Measures

In order to ensure that listed companies and relevant security service providers fulfill their responsibilities, the Exchanges Rules further specified the supervision measures taken on a daily basis during the listing review process. According to the Exchanges Rules, the supervision measures that SSE and SZSE may take include: (1) requiring certain person to explain and provide statements regarding relevant issues; (2) issuing supervision letters; (3) conducting interview with relevant persons; (4) requiring listed companies to provide relevant documents or materials for inspection; (5) reporting to CSRC. In addition, SSE and SZSE introduced verbal warning as a new disciplinary measure.

(3) Escalation in the Penalties

By integrating the regulatory practices of the Stock Exchanges, the Exchanges Rules expanded the responsibility of Key Participants. Under the Exchanges Rules, the Stock Exchange may take disciplinary actions against Key Participants in any of the following circumstances: (1) they violate the provisions of the Exchanges Rules, causing the application documents or the information disclosure documents submitted by the listed company to contain false, misleading representation or material omissions; (2) such persons organize or instigate the listed company to conduct financial falsification, profit manipulation, or conceals important facts or fabricates material false contents in the application documents or the information disclosure documents; (3) such persons obstruct inspections from the Stock Exchanges, or conceal, destroy or provide false evidence; or (4) such persons severely interfere the review process by any illicit means.

In addition, the New Refinancing Measures specified that measures such as prohibition of access to securities market may be taken against the listed company and relevant responsible participants. For listed companies with false, misleading representation or material omissions in its listing application documents, their application for refinancing will not be accepted for three to five years, which originally was one to five years.

Conclusion

The refinancing reform, as part of the full implementation of registration-based system, further untightens the limitations on the refinancing activities of listed companies and significantly optimizes the offering requirements, which could increase the funding capacity, efficiency and certainty of listed companies in the capital market. The summary procedure and classified review mechanism offer a fast track for listed companies to satisfy their urgent capital needs. We look forward to the new vitality in the market after the refinancing reform. After all, there is no such thing as being too prepared.

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