China’s securities regulator has officially launched new regulations governing the issuance and trade of Chinese Depository Receipts (CDR’s)
The China Securities Regulatory Commission (CSRC) officially launched the “Chinese Depository Receipt Issuance and Transaction Administrative Measures (Trial)” (存托凭证发行与交易管理办法（试行）) on 6 June, alongside a slew of new regulations including the “Initial Public Offering and Listing Administrative Measures” (首次公开发行股票并上市管理办法), the “Initial Public Offering and Next Board Listing Administrative Measures” (首次公开发行股票并在创业板上市管理办法) and the “Trial Red Chip Company Public Depository Receipt and Listing Application Documents” (试点红筹企业公开发行存托凭证并上市申请文件).
CDR’s are a new instrument that enable domestic investors to acquire equity stakes in companies listed on external bourses, in a move that Beijing hopes will bring Chinese tech giants listed overseas back to the A-share market.
The new CDR measures outline issuance application standards as well as require Chinese stock exchange to produce regulations governing listing, giving greater impetus to the deployment of the instruments within China.
CSRC said that the launch of the new regulations will “support innovative enterprises that are in accordance with national strategy, control key technologies and that enjoy a high-level of market acceptance.
“The issuance of shares or CDR’s on domestic capital markets is a key measures for supporting supply-side structural reforms, expediting upgrades to the economic structure, and raising the quality of listed companies.”
According to CSRC the launch of CDR’s will help to enhance the structure of China’s capital markets, improve capital market mechanisms, better employ the role of capital markets in investment and finance, and further drive reform, opening and the stable growth of capital markets.
Recent reports indicate that smartphone giant Xiaomi could raise as much as 30% of its $10 billion Hong Kong-IPO from mainland investors via the use of CDR’s, while applications have already been submitted for 6 new “unicorn” investment funds that will use CDR’s to invest in tech companies.
The new measures place a heavy emphasis upon risk prevention, with CSRC setting strict application standards and selection mechanisms for enterprises participating in the trial, as well as requiring that applications only be submitted “following comprehensive and prudent inspections conducted by experienced sponsoring institutions in accordance with due diligence principles.”
CSRC also makes strict demands of sponsors with respect to work quality and due diligence, and calls for heavy scrutiny of trial enterprise numbers and fund-raising sums.
“Issuers and their underwriters must establish rational and effective incentive and restraint mechanisms for institutional investors participating in price inquiries, and expedite the participation of professional institutional investors,” said CSRC.