In June 2022, Switzerland witnessed the launch of the China-Switzerland Stock Connect Program, which provides Chinese companies with a streamlined pathway to access the Swiss capital markets through the issuance of so-called global depositary receipts (“GDRs”) on SIX Swiss Exchange. Following a swift start, the success of the Program was tested after the Chinese Securities Regulatory Commission (“CSRC”) announced its intention to introduce new rules for the overseas listing of securities by Chinese listed companies. During the first semester of 2023, a new set of rules came into effect which introduced a series of changes, the consequences of which are still being determined. However, as the impact of the new CSRC regulations continues to unfold, there are grounds for optimism with respect to the future of the GDR market in Switzerland.

By Thiago Freixo Claro (Reference: CapLaw-2023-37)

1) Introduction: The New Regulatory Framework for the Issuance of GDRs in Switzerland

Amidst increasing expansion of Chinese companies into overseas markets, China has been continuously opening its capital markets and thereby offering foreign investors opportunities to get direct exposures to Chinese securities. On 28 July 2022, the much-anticipated China-Switzerland Stock Connect Program (the “Program”) was launched in Switzerland with the participation of senior government representatives of China and Switzerland and representatives of Shanghai Stock Exchange, Shenzhen Stock Exchange and SIX Swiss Exchange (“SIX”). The Program provides Chinese companies with a gateway to access the Swiss capital markets through the issuance of global depositary receipts on SIX. Global depositary receipts, or GDRs, are negotiable certificates issued by a depositary bank representing an interest in a certain number of underlying A-shares of a Chinese company listed on the Shanghai or Shenzhen stock exchange (“PRC Company”). Holders of GDRs are entitled to indirectly exercise (through the depositary) the membership and economic rights attached to the underlying A-shares.

Upon the Program’s launch, four GDR offerings simultaneously took place on SIX. Since then, fifteen Chinese issuers, nine in 2022 and six in 2023 (to date), have availed of the Program for a combined deal volume of 5.5 billion US dollars. These listings positioned SIX as one of the most active exchanges in Europe in 2022 and thus far in 2023. 

In 2023, the CSRC introduced a set of rules establishing a new legal framework for offerings of PRC domestic companies outside of Mainland China (“Overseas Listing”), including offerings of GDRs, (the “New CSRC Regulations”) to align and unify the requirements and regulatory systems for Overseas Listings. 

On 17 February 2023, CSRC published the “Trial Measures for the Administration of Overseas Offering and Listing of Securities by Domestic Companies“, along with certain ancillary guidelines aimed at implementing a uniform regime for the overseas offering of equity securities and the listing of PRC Companies. A few months later, on 16 May 2023, CSRC issued the “Guidelines for the Application of Regulatory Rules – Overseas Offering and Listing No. 6: Guidelines for Overseas Issuance of Global Depositary Receipts by Domestic Listed Companies” (the “GDR Guidelines”), setting out specific rules applicable to the overseas offering of GDRs.

Based on the new CSRC rules and GDR Guidelines, each of the Shanghai and the Shenzhen Stock Exchanges released on 18 July 2023 their revised “Interim Measures for the Listing and Trading of Depositary Receipts under the Stock Connect Scheme between Shanghai/Shenzhen Stock Exchanges and Overseas Stock Exchanges” (the “Interim Measures”), providing further rules with respect to the listing, trading, cross-border conversion, and disclosure information of GDRs convertible into domestic underlying A-shares.

The practical implementations of the New CSRC Regulations are expected to be subject to further guidance from the relevant regulators, including the CSRC, and the Shanghai and Shenzhen stock exchanges.

2) What is new?

The New CSRC Regulations introduce a number of technical changes to the process of carrying out a GDR offering. These changes impact the following areas: 

– Sponsorship: new obligations have been placed on the issuer to engage an onshore (i.e. PRC) sponsor; 

– Registration and filing requirements: new procedures for filing and reviewing registration applications apply, including, notably, a requirement for the relevant onshore stock exchange (i.e. Shanghai or Shenzen stock exchange) to review the registration application; 

– Offering intervals: there is now a minimum time span between offerings that must be adhered to;

– Use of proceeds: issuers are required to use the proceeds from the GDR offering in accordance with specific regulatory guidelines; and

– Disclosure and documentation: issuers are now required to submit a series of additional documents and comply with additional disclosure requirements.

For a period in early- to mid-2023, new GDR offerings in Switzerland slowed down as issuers anticipated the introduction of new rules by the CSRC. Now that the New CSRC Regulations have been published, issuers and transaction advisors alike are taking the opportunity to assess the impact of the changes and how they will affect future GDR offerings under the China-Switzerland Stock Connect Program. Nevertheless, the GDR market in Switzerland proved to be resilient, with six GDR offerings taking place in 2023 thus far, two of which after the publication of the GDR Guidelines last May, for a combined deal volume of USD 1.8 billion.

3) Conclusion: What is next?

Since the inception of the Program, the China-Switzerland Stock Connect Program has been able to attract more PRC Companies listing GDRs overseas than any other offshore jurisdiction. In the first year of the China-Switzerland Stock Connect Program, fifteen PRC Companies listed GDRs on SIX, roughly three times the number of PRC Companies listed in London (where the same type of stock connect program was launched already back in 2019). We believe this demonstrates the attractiveness of the Swiss capital markets for PRC Companies, as well as the efficacy of the China-Switzerland Stock Connect Program. The relatively high number of GDR offerings in Switzerland has also bolstered the Swiss capital markets over a period that has otherwise seen relatively limited activity by traditional issuers. 

While the full impact of the New CSRC Regulations on the Swiss market remains to be fully realized, there are compelling reasons to expect that the Swiss capital markets will remain attractive for GDR offerings under the China-Switzerland Stock Connect Program. The stage is set for the GDR market in Switzerland to reinvigorate and flourish even further.

Thiago Freixo Claro (thiagofreixo.claro@nkf.ch)