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Mainland Bourses Announce Detailed CDR Rules Clearing Hurdles for China Tech Firm Issuance

Mainland China’s stock exchanges have issued detailed rules for the trading of China depositary receipts (CDRs), including capping the voting rights of special shares, clearing the way for foreign-listed Chinese tech titans like JD.com to list at home.

The regulations specify the standards companies must meet to offer CDRs, in particular the limits on so-called dual-class stockholding structures, which founders of tech and family-owned companies favor as a way of retaining control of their firm after a public listing.

Companies applying to issue CDRs must offer at least 100 million such securities or the issue must have a total value of at least five billion yuan ($777.3 million), the Shanghai and Shenzhen bourses announced Friday. In addition, firms may not have had any major law violations or fraudulent financial reports in the last three years to qualify to issue CDRs, according to the rules.

The regulations also stipulate that under a dual-class share structure, the number of voting rights special shares, or “Class B” stock, can carry may not exceed 20 times the voting rights of ordinary shares, or “Class A” stock.

That ceiling is higher than the voting rights ratios found at many Chinese tech firms. For example, the voting rights of the Class B stocks of e-commerce giant Alibaba Group Holding Ltd. and search firm Baidu, Inc. are both 10 times that of the firms’ Class A shares.

The bourses’ decision also clears a major hurdle for companies that have greater concentrations of voting power to be listed on the mainland. For instance, Liu Qiangdong, founder and chairman of the business-to-consumer e-commerce giant JD.com, controls nearly 80% of the firm’s voting rights with Class B shares voting at a 20:1 ratio to Class A shares.

The CDR issuance rules require that a firm’s Class B shareholders have made “major contributions” to the company and continue to hold key positions at the firm, such as serving as a director, after its public listing. The combined number of shares held by all Class B stockholders must account for at least 10% of the company’s total voting stock, according to the rules.

To protect the interests of ordinary investors, the rules ban companies from raising the vote weighting of Class B shares in most cases after they go public and require that the number of Class A shares account for no less than 10% of the total voting stock.

All shares will carry the same weight of voting rights when decisions are to be made on major issues such as revisions to the company’s articles of incorporation or proposed mergers, acquisitions and spinoffs, the regulations said.

The voting rights of Class B shares will be reduced to those of Class A shares if a stockholder transfers the special stock to parties unaffiliated with the company or if he has been disqualified from owning such shares for reasons such as being unable to carry out his official duties, according to the rules.

Separately, for companies that have not been listed on any stock exchange, the regulations prohibit their controllers, directors and other senior managers from selling their stockholdings acquired prior to the domestic floatation before the firm becomes profitable.

The two stock exchanges also reminded investors to be wary of speculation on the CDR issues and the losses that could result. They also vowed to “severely” punish speculators through measures such as suspending their trading accounts.

The rules announced by the Shanghai and Shenzhen bourses came after the China Securities Regulatory Commission, the country’s securities watchdog, released earlier this month a series of guidelines for the CDR program, aimed at making the country’s best-known tech brands accessible to domestic investors while bringing closer to home a sector crucial for upgrading the economy.

Chinese smartphone-maker Xiaomi Inc. is the first major tech firm to apply to issue CDRs in a listing that will complement its upcoming initial public offering on the Hong Kong Stock Exchange. The company said last week that at least half the shares it is offering will be sold through CDRs on the mainland market.

Contact reporter Fran Wang (fangwang@caixin.com)


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