Following approval from the Swiss Financial Market Supervisory Authority FINMA, SIX Exchange Regulation’s (SER) revised regulatory framework for global depositary receipts (Hinterlegungsscheine; GDRs) entered into force on 25 July 2022. These long-awaited revised regulations paved the way for the listing and trading of GDRs on the SIX Swiss Exchange (SIX) via the China-Switzerland Stock Connect Program. On 28 July 2022, the first four Chinese companies have listed GDRs in accordance with the Standard for Depositary Receipts on SIX and commenced trading in the newly introduced separate trading segment for GDRs. No GDRs had ever been listed on SIX before. This article provides an overview of the main aspects of SIX’s Standard for Depositary Receipts, the China-Switzerland Stock Connect Program and the revised GDR specific regulations of SER.

By Christian Schneiter (Reference: CapLaw-2022-35)

1) Standard for Depositary Receipts 

Since 2007, the listing rules of SER have provided for a specific regulatory standard for GDRs which is called Standard for Depositary Receipts. GDRs – the Swiss equivalent to American depositary receipts (ADRs) which are used by non-U.S. companies to access the U.S. capital markets – are tradable securities that are issued to represent a certain number of deposited equity securities, i.e. the listed underlying shares. They allow the indirect exercise of membership and economic rights attached to the deposited equity securities (see article 90 of the listing rules of SER dated 15 July 2022 (LR)). The underlying listed shares are deposited with a depositary who must either be (a) licensed as a bank under the Banking Act or as a securities firm under the Financial Institutions Act, or (b) subject to equivalent foreign supervision (see article 92 (1) LR and section 3)b) below).

On 28 July 2022, the first four Chinese companies, i.e. Ningbo Shanshan Co., Ltd., Gotion High-Tech Co., Ltd., GEM Co., Ltd., and Keda Industrial Group Co., Ltd., listed GDRs in accordance with the Standard for Depositary Receipts on SIX and commenced trading in the newly introduced trading segment for GDRs. These four Chinese companies raised a total of around USD 1.6 billion thereby. Previously, there was no public market for GDRs at SIX since no issuer had made use of the possibility to list GDRs on SIX before. On 21 September 2022, Lepu Medical Technology (Beijing) Co., Ltd. and on 26 September 2022, Joincare Pharmaceutical Group Industry Co., Ltd. became the fifth and the sixth companies to list GDRs on SIX and according to public reports, several other listed Chinese companies are likely to follow these newcomers’ lead. 

Foreign listed non-Chinese companies have so far sought a secondary listing of their shares on SIX rather than a listing of GDRs. The main reason for them choosing that route is that under certain conditions significant exemptions for secondary listings of shares apply with respect to the SIX listing requirements as well as the obligation to publish a prospectus. Chinese listed companies are, however, bound by strict domestic regulations for doing secondary listings of shares abroad, making a follow-on on the GDR segment of SIX a less arduous route which has become attractive with the introduction of the China-Switzerland Stock Connect Program (see section 2) below).

2) China-Switzerland Stock Connect Program

In June 2019, the so-called Shanghai-London Stock Connect Program was launched in order to facilitate a new level of capital cooperation between the People’s Republic of China (China) and the United Kingdom. On 11 February 2022, the China Securities Regulatory Commission (CSRC) expanded the Shanghai-London Stock Connect Program to include companies listed on the Shenzhen Stock Exchange (SZSE), as well as the SIX and German stock exchanges. The effects of this expansion were quickly evident with several Chinese listed companies announcing their intention to seek to raise funds through listing and trading GDRs on SIX. However, as of mid September 2022 no Chinese company has listed GDRs in Germany. SIX worked with the CSRC, the SZSE and the Shanghai Stock Exchange (SSE) to establish a stock connect system (China-Switzerland Stock Connect Program) that enables Chinese companies listed on the SZSE or the SSE, respectively, to list and trade GDRs representing their domestic shares (A Shares) on SIX (the focus of this article) and, vice versa, it allows Swiss listed companies to obtain a listing of Chinese depositary receipts in China. 

Under the China-Switzerland Stock Connect Program investors are able to buy GDRs on SIX or another legitimate trading venue in the normal manner or (subject to Chinese law restrictions applicable to foreign investors) instruct a designated broker to buy A Shares on the SZSE or the SSE (where the A Shares are listed) and then instruct the depositary to create GDRs representing such A Shares (subject to the cap of the total amount of GDRs actually approved by CSRC). Vice versa, in order to sell GDRs, an investor may either sell GDRs on SIX or another legitimate trading venue in the normal manner or instruct a designated broker to redeem the GDRs and sell the underlying A Shares on the SZSE or the SSE (where the A Shares are listed). This means that the China-Switzerland Stock Connect Program involves a mechanism connecting the capital pools that exist at the participating stock exchanges in China and in Switzerland via a two-way depositary receipt program. The intention of this mechanism is to provide fungibility between the GDRs and the underlying A Shares by enabling investors or their brokers to place, buy and sell orders with the designated brokers who are able to seek the best price for the equity securities from either market. It should also be noted that pursuant to CSRC regulations, GDRs subscribed for by investors in an offering may not be redeemed within 120 days following the first day of trading. Therefore, during such a lock-up period GDR holders cannot redeem their GDRs and sell the underlying A Shares on the SZSE or the SSE and are thus, only able to sell their GDRs through SIX or another legitimate trading venue. 

3) Revised Listing Rules

a) Key Amendments

The key amendments to the revised LR concern the listing requirements applicable for GDRs (see b) below) and the conditions for maintaining the listing of GDRs on SIX (see c) below).

A listing of GDRs in accordance with the Standard for Depositary Receipts on SIX has elements of a primary and a secondary listing of shares but is closer to a primary listing. After reviewing the previous LR and taking into account this aspect as well as the particularities of the China-Switzerland Stock Connect Program, the Regulatory Board concluded that in a few areas the previous LR provided for less stringent obligations than those of other financial centres which could prove negative from an investor’s point of view. As a consequence, the conditions for maintaining the listing have been brought closer to those of the SIX main market (see c) below). Under the previous LR, the GDR specific listing requirements with respect to the issuer and the GDRs were already the same as the relevant requirements applicable for a primary listing of shares on the SIX main market. Therefore, the listing requirements have undergone only a few selective changes relating to the required content of the deposit agreement and the prospectus (see b) below).

b) Revised Listing Requirements

Deposit Agreement: In order to ensure that the GDR holders can exercise the membership and economic rights attached to the underlying shares, the issuer of the underlying shares whose shares are listed on a foreign stock exchange (GDR Listed Issuer) has to enter into a deposit agreement with the depositary who issues the GDRs. Already under the previous LR, the deposit agreement had to provide for the underlying shares to be held by the depositary on a fiduciary basis (or on the basis of similar arrangements under applicable law) on behalf of the investors and also needed to ensure that the depositary can exercise the membership and economic rights attached to the underlying shares in the interest of the investors in the GDRs.

In addition to this, the revised LR newly require that the underlying shares must be held by the depositary in a way that they can be separated and segregated for the benefit of the investors in the event of debt restructuring or insolvency of the depositary (article 93 (1) LR). A further requirement is that the deposit agreement must now oblige the depositary to provide the Regulatory Board and/or SER, upon request, with all information and documentation in connection with the implementation of the deposit agreement, in particular with respect to the number of underlying shares deposited and GDRs issued (article 93 (2) LR).

Prospectus: On top of that, the LR provide that an issuer who applies for a listing on SIX must submit evidence that it has a prospectus that has been approved by a reviewing body (e.g. SER) or that is deemed to be approved in accordance with the Financial Services Act (FinSA) (article 95 (1) LR). An exemption from this obligation can apply when GDRs of the same category shall be listed that are already admitted to trading on SIX (see article 38 (1) (a) FinSA). When GDRs are, however, listed for the first time on SIX, as a rule, there is no exemption. The required minimum content applicable for an offering and/or a listing prospectus for equity securities is set out in article 40 FinSA and in Annex 1 of the Financial Services Ordinance (FinSO). With respect to a GDR listing prospectus it has now been clarified in the new para. 2 of article 95 LR that the prospectus must contain appropriate information about the depositary, the GDRs and the deposit agreement, in particular information about the rights of the GDR holders under the deposit agreement, insolvency protection (i.e. protection of the GDR holders in the event of debt restructuring or insolvency of the depositary) and the risks related to the GDR set-up. The disclosure of this information is required even in cases where the GDR listing does not trigger the obligation to publish a prospectus. 

The other listing requirements applicable for a listing of GDRs on SIX in accordance with the Standard for Depositary Receipts remain unchanged. This means in particular that:

– The requirements that must be fulfilled by the GDR Listed Issuer (concerning, inter alia, the track record, the recognized accounting standard, the auditors and the audit report, the minimum equity capital, etc.) are the same as for the SIX main market (see article 91 LR in conjunction with articles 10 to 16 LR). As regards the accounting standards of Chinese GDR Listed Issuers, SER accepts the Accounting Standard of the People’s Republic of China for Business Enterprises (ASBE) in addition to the international accounting standards (IFRS and US GAAP).

– The same requirements apply to GDRs as for a primary listing of shares on the SIX main market (see article 94 (1) LR in conjunction with articles 17 to 26 LR). This means that at the time of the listing, the GDRs must, among other things, (i) have been validly issued, (ii) have a sufficient free float, i.e. at least 20% of all of the issuer’s outstanding GDRs (not the underlying shares) in the same category must be in public ownership and the capitalization of those GDRs in public ownership must amount to a minimum of CHF 25 million, (iii) be properly tradeable on SIX and (iv) be able to be cleared and settled via the settlement systems that are permitted by SIX. Further, there must also be evidence that the underlying shares to be represented by the GDRs are validly issued. This requirement is met in practice by a legal opinion containing a relevant confirmation issued by a Chinese law firm.

c) Revised Conditions for maintaining the Listing

As soon as and for as long as the GDRs are listed on SIX, GDR Listed Issuers have to fulfil certain conditions to maintain the listing of GDRs under the LR. The following are the main amendments in this respect:

– Management transactions: Under the previous LR, GDR Listed Issuers were exempt from the obligation to disclose management transactions in GDRs and the underlying shares. This exemption has been abolished. As a result, GDR Listed Issuers have to ensure that the members of their board of directors and the executive committee report transactions in both the GDRs and the underlying shares (see article 100 LR in conjunction with article 56 LR and the SIX Directive on the Disclosure of Management Transactions).

– Corporate governance: The SIX Directive on Information relating to Corporate Governance is not applicable to GDR Listed Issuers (see article 101 (1) LR). The revised LR, however, newly determine that a GDR Listed Issuer is (only) required to declare in both the prospectus in accordance with the FinSA and the annual reports that it adheres to the corporate governance standards of its home market (see article 101 (2) LR). 

– Interim reporting: Under the previous LR, GDR Listed Issuers were exempt from the obligation to publish interim financial statements. This exemption has been revoked in the revised LR (see article 102 LR) and thus, GDR Listed Issuers are now subject to the same interim reporting obligations as the issuers whose equity securities are listed on the SIX main market.

– Ad hoc publicity: The revised LR now specify that GDR Listed Issuers are obliged to disclose price-sensitive facts, i.e. are subject to the ad hoc publicity obligations (article 103 LR in conjunction with article 53 et. seq. LR and the SIX Directive on Ad Hoc Publicity). This ad hoc publicity applies to both the GDRs and the underlying shares. With respect to the underlying shares this means, in particular, that if price-sensitive facts in the home market of the underlying shares are being made public, the GDR Listed Issuers must simultaneously disclose such ad hoc information in Switzerland.

– Reporting obligations for depositaries: Under the previous LR, depositaries were subject to the same reporting obligations (including, inter alia, ad hoc publicity) as GDR Listed Issuers. These obligations for depositaries have now sensibly been abolished (see article 103 LR).

d) Items to be clarified

With respect to the following two items SER created a practice which, whilst welcome, has no basis in the SER regulations: 

– Swiss paying agent requirement: It is a listing requirement for the GDRs that services pertaining to interest and capital, as well as all other corporate actions, are provided in Switzerland (article 94 (1) LR in conjunction with article 24 LR). With respect to the GDR listings so far at SIX only international banks have been acting as depositary who have been using the European International Central Security Depositories Euroclear Bank SA/NV (as operator of the Euroclear System) and Clearstream Banking S.A. to make the respective book-entry settlement systems available for clearing and settlement of the GDRs. As it would be impracticable to use a paying agent in Switzerland under such set-ups, SER has been willing to grant exemptions relating to this listing requirement. In the interest of clarity, it would have been desirable if a GDR specific exemption had been created in article 24 LR.

– Regular reporting obligations: The process relating to the creation and redemption of GDRs under the China-Switzerland Stock Connect Program (see section 2) above) is not under the control of the Chinese GDR Listed Issuer. Whilst the number of GDRs listed at any time on SIX may increase or decrease at the option of the GDR holders and the A shareholders respectively, the total share capital of the Chinese GDR Listed Issuer remains unchanged. As the rules on regular reporting set out in the SIX Directive Regular Reporting Obligations (DRRO) are designed to handle capital reductions and capital increases of issuers but have not been adapted to cover such cross-border creation and redemption of GDRs and as it would not be practicable to report each change in the number of GDRs, SER’s practice is to grant Chinese GDR Listed Issuers an exemption from the regular reporting obligations and accepts a yearly report stating the number of issued (listed) GDRs, the number of issued (listed) GDRs since last report, the number of newly issued (listed) GDRs (increase), the number of GDRs redeemed (reduction) since last report, the number of remaining (unlisted) GDRs and the number of remaining (unlisted) GDRs since last report. This practice, whilst welcome, has no basis in the DRRO. Therefore, it would be desirable to have the necessary clarity through appropriate amendments to Annex 1 of the DRRO.

4) Revised Trading Rules

A separate trading segment has been created for the GDRs listed on SIX in the revised SIX Trading Parameters Guideline. It is based on the model for the Mid-/Small-Cap Shares trading segment, i.e. the segment that includes shares which are listed in the regulatory standard for Special Purpose Acquisition Companies (SPACs). However, shorter trading hours apply as trading only begins at 3 pm (CET) and continues until 5.20 pm (CET) at which time the closing auction starts, and continues until trading closes at 5.30 pm (CET) with a random close of trading with two minutes. Following the closing auction, “Trading-at-Last” provides investors with on book trading at the official closing price until 5.40 pm (CET). Regular trading hours for the other equity securities (except in the Sparks trading segment) are quite different, with trading open between 9 am (CET) and 5.40 pm (CET) on each trading day. 

In Switzerland as well in China, price-relevant (ad hoc) information has to be published outside trading hours. One of the intentions of these shortened trading hours for GDRs is to ensure compliance with the ongoing ad hoc publicity obligations of Chinese GDR Listed Issuers in Switzerland as well as in China as these allow them to publish ad hoc information outside trading hours in Switzerland (where the GDRs are listed) and in China (where the underlying shares are listed). Further, the shortened trading hours for GDRs serve to pool secondary market liquidity with the intention of optimizing price building and trade execution.

5) Conclusion

The introduction of the China-Switzerland Stock Connect Program provides a new channel for Chinese companies which are listed on the SZSE or the SSE to raise capital in Switzerland. One of the unique features of this new stock trading link is the fungibility of GDRs and the underlying A Shares. With the entering into force of the revised LR, a framework has been created which enables Chinese GDR Listed Issuers to efficiently list GDRs on SIX even though there remain some specific items which seem to be in need of clarification since SER’s practice, whilst welcome, has not yet been reflected entirely in the revised LR. 

The establishment of the separate trading segment for GDRs on SIX with shorter trading hours is geared to pool secondary market liquidity and thus, to optimize price building and trade execution while allowing Chinese GDR Listed Issuers to release price-relevant facts outside trading hours simultaneously in both China and Switzerland.

It can be expected that the trend to SIX GDR listings via the China-Switzerland Stock Connect Program will continue unabated. Whilst so far, mainly international and Chinese financial institutions were involved in the GDR deals (as underwriters, bookrunners, global coordinators and depositaries), Swiss banks are also stepping into this new business.

Christian Schneiter (cschneiter@vischer.com)