Q & A on Launching Pilot Program of Creating Companies as Models for Information Disclosure

Recently, the Shanghai Stock Exchange (SSE) has drawn up the "Implementation Measures for Pilot Program of Creating Companies as Models for Information Disclosure Among Listed Companies on the Shanghai Stock Exchange (Draft)" (the "Measures" for short) and publicly solicited opinions from the market. An SSE official has answered the questions about the major considerations, ideas and specific contents of the pilot program as follows.

Q1: What are the main considerations for the pilot program of creating companies as models for information disclosure?

A: Classified regulation is the basic approach to continuous regulation of listed companies. Since the beginning of 2019, the China Securities Regulatory Commission (CSRC) has reiterated that classified regulation should be used as an important method to improve the balance between the efficiency and the quality of regulation, and we should focus on both ends to improve the middle and streamline and refine regulation to achieve effectiveness. In practice, quite a few listed companies commented that the existing regulatory arrangements mainly highlight the strict supervision on risky companies and troubled companies, and suggested implementing differentiated regulation on high-quality companies, so as to show the regulatory orientation of giving better convenience for quality companies. In this context, with careful study, the SSE has planned to launch the pilot program of creating models for information disclosure among the companies listed on the SSE main board, and provide the companies in the program with more convenience in information disclosure, and has formulated corresponding measures for implementation, on which the opinions are openly solicited. The considerations are mainly in three aspects as follows:

First of all, there are expectations in the market. Classified regulation of listed companies means not only intensifying the regulation on risky companies, but also providing favorable conditions for quality companies. In practice, quite a few companies have proposed that it is necessary to distinguish listed companies according to their real situations, especially on information disclosure and regulated operations, so as to implement the differentiated regulation, and we should not supervise “good students” with the methods we use upon “bad students”. Some market experts observed that quite a few mechanisms and standards in the current systems and rules are too strict, and have increased the burden on many high-quality companies and contained the development of those companies in the capital market, only for the purpose of controlling a small number of risky companies. Therefore, the experts called for making necessary improvement in the systems as soon as possible. The introduction of the "Measures" has been a response to market expectations with the aim of exploring new approaches to classified regulation.

Secondly, there is necessity in regulation. On the SSE main board, there have grown a large number of companies that follow requirements and have excellent performance in information disclosure. Characterized by high quality information disclosure in a professional, conscious and orderly way, those companies have a strong internal motivation to use the capital market to boost their development, thus forming a good foundation for implementing separate policies. With the overall regulatory resources limited, if the differentiated regulation is implemented on the high-quality companies to give full play to their self-management capabilities, more regulatory resources will be freed up to deal with key issues and major risks, so as to make the regulation more effective.

Thirdly, there are requirements in the policies. Since 2019, the CSRC has reiterated that improving the quality of listed companies should be the primary goal of regulation, and the key task should be making effective efforts in continuous regulation, precise regulation and classified regulation. In terms of classified regulation, we should adhere to the principle of achieving effectiveness by streamlining and refining the regulation, distinguish the circumstances, focus on the key points, and carry out precise regulation. In accordance with these requirements, with in-depth studies and analysis, the SSE has planned to launch the pilot program of creating companies as models for information disclosure, and implement differentiated arrangements on a number of companies with long-term outstanding performance in information disclosure, so as to accumulate experience and provide samples for cementing the classified regulation.

Q2: What are the main ideas for launching the pilot program of creating companies as models for information disclosure?

A: On the basis of the above-mentioned considerations, the “Measures” will adopt some necessary institutional arrangements to support a number of companies listed on the SSE main board in participating in the pilot program. It is planned to take about three years to encourage and form a group of model companies that can play an exemplary role in the information disclosure, and cultivate a favorable market environment for the listed companies to focus on their main business, follow requirements, and improve quality. The specific ideas are mainly reflected in the following three aspects:

First of all, the program is oriented toward “creating”. In the pilot phase, it is planned to focus on the information disclosure with the goal of supporting the listed companies in building themselves into modelcompanies for information disclosure. The companies selected are creating the models for information disclosure, which does not ensure that they have been or will be high-quality model companies. The creation may succeed or fail due to various problems. In the process of creation, the SSE will mainly provide guidance and support, and will not make any substantial judgment on the value of a company.

Secondly, the regulatory services should be improved. In order to carry out the requirements for classified regulation, mobilize high-quality companies to actively apply for participation in the pilot program, enhance the demonstration effects of the program, it is planned to implement differentiated arrangements for the companies building themselves into model companies, optimize the regulatory services and enrich the supportive measures. Necessary convenience will be provided in regular supervision, policy consultation, business training, service for capital operation and other areas, and greater autonomy in information disclosure will be granted to the companies.

Thirdly, moderate constraints should be introduced. The institutional requirements for the companies participating in the pilot program will be relaxed in some aspects and tightened in the other, with some conveniences to be provided on the one hand and necessary constraints to be intensified on the other. In this regard, it is planned to require the companies in the pilot program to formulate the annual plan for information disclosure and investor relationship management, proactively explain the arrangements for information disclosure in the year to the market, and accept the market constraints. At the same time, the in-process regulation mechanisms will also be set up, including regular adjustment, dynamic adjustment, self-application to leave the program and a watch list etc., and the companies with major problems or risks during the pilot program will be moved out of the list of the program in a timely manner.

Q3: What are the requirements for a listed company to participate in the pilot program?

A: Considering that the creation of the model companies for information disclosure is also an exploratory effort, in order to ensure the effectiveness of the pilot program, the “Measures” lists the basic conditions for the companies to participate in the program. The “Measures” mainly require the participating companies to have a good record of information disclosure, regulated corporate governance operations, stable capacity for sustainable operation, and long-term attention to returns for investors. At the same time, there must not be any negative circumstances that clearly do not meet market requirements.

Specifically, there are five main requirements. First of all, an excellent record of information disclosure quality should be maintained, and the annual evaluation results for the company's information disclosure should all be A in the last 3 years, or 4 As and 1 B in the last 5 years. Secondly, the company should have orderly governance and operations, sound internal controls, effective management, and strong capabilities of compliance and risk control, without major defects in internal control and governance. Thirdly, the capacity for sustainable operation should be stable. The company's net profit before and after deducting non-recurring profits and losses should be positive every year for the past 3 years, or its income from the main business should amount to more than RMB500 million in the past 3 years. Fourthly, the company should attach long-term importance to the returns for investors, and in principle, the company is required to have a cash dividend ratio of more than 30% each year in the past 3years. Some companies should fully explain and disclose the reasons in accordance with the "Guidelines for Listed Companies’ Distribution of Cash Dividends" if their cash dividend ratio is less than 30% due to the needs in production or operation. Fifthly, there should not be major negative circumstances, and the company must not have major problems or hidden risks in business operation, corporate governance, information disclosure and other aspects.

Q4: How will the classified regulation be implemented on the companies participating in the pilot program according to the “Measures”?

A: Adhering to the principle of integrating regulation in services, the "Measures" will step up the regulatory services for the companies building themselves into demonstration companies for information disclosure in classified regulation, and provide the companies in the pilot program with appropriate and necessary conveniences in information disclosure, so as to support and guide them in building a demonstration company. Specifically, there are five ways of conducting classified regulation.

First of all, the regulatory services will be more relevant. More targeted services will be provided to the companies participating in the pilot program, with conveniences to be offered in regular supervision, policy consulting, business training, service for capital operation and other areas. In terms of information disclosure, we will pay more attention to providing services to the companies to improve the quality and effectiveness of information disclosure, strengthen investors' understanding of the company, and discover the company’s value.

Secondly, greater autonomy in information disclosure will be granted to the company. Considering that the companies participating in the pilot program have high quality of information disclosure and can usually perform their obligations of information disclosure consciously, we plan to make differentiated arrangements for the specific information disclosure requirements on the premise of consistent regulatory standards for information disclosure. The companies participating in the pilot program may make appropriate adjustments to the contents and formats of relevant interim announcements based on the actual conditions and investors’ demands, except for the announcements on unusual fluctuations in stock trading and the clarification announcements. At the same time, the SSE may require the companies to make supplementary announcements in accordance with the format guidelines for the interim announcements when deemed necessary.

Thirdly, the companies are encouraged to disclose valuable information voluntarily. The companies participating in the pilot program are encouraged to voluntarily disclose the information that will influence the investors’ value judgments and investment decisions, in accordance with the company's business development and the industry characteristics, so as to better satisfy investors' right to know and tap the company's potential market value.

Fourthly, necessary support will be provided for the companies’ development in the capital market. The companies included in the pilot program will be assisted in financing through bond issuance in an easy and rapid manner according to the law, and the SSE will provide support within the scope of relevant responsibilities such as review and issuance. When the companies participating in the pilot program conduct capital operations such as refinancing, mergers, acquisitions and reorganizations, the SSE will, according to the actual situations, issue documents of support and report the company’s participation in creating a demonstration company for information disclosure to the competent authorities in accordance with the laws and rules.

Fifthly, the announcements will be marked with the pilot program of creating demonstration companies for information disclosure. The companies participating in the pilot program can mark their regular reports and interim reports with “SSE (XX Year) Company of Creating Information Disclosure Model”, so as to present their good images to the market as well as accept the open inspection in the market, and gradually establish the brand value of companies of creating information disclosure model.

Q5: What institutional arrangements has the SSE made to ensure the objectivity and fairness for the pilot program?

A: Generally speaking, in order to ensure the openness and fairness of the work related to the pilot program, the “Measures” provides clear institutional arrangements, mainly by insisting on objective standards and open and transparent procedures for the program.

First of all, the standards of the pilot program are objective. As mentioned earlier, the quality of information disclosure, the ability of sustainable operations, the returns for investors and negative conditions, etc. set for the pilot program are objective and definite on the whole, with few matters requiring subjective judgment. Relevant standards are fair and open, and easy to supervise.

Secondly, the procedures for the pilot program are standardized. The SSE’s regulators of listed companies will verify the companies’ application forms item by item against the basic conditions stipulated in the “Measures”, and solicit opinions from the relevant departments, and then the list of the companies included in the pilot program will finally be determined after the review and approval of the meeting of the SSE General Office.

Thirdly, the right to object is protected. After the results of listing of the companies included in the pilot program are determined, the relevant companies will be notified in a timely manner. The companies may submit a written objection to the SSE within 3 trading days from the date of receiving the result notification, and the SSE will respond within 5 trading days after receiving the objection.

Fourthly, the results will be announced. The list of the companies building themselves into demonstration companies for information disclosure will be published on the website of the SSE with a publicity period of 10 trading days, so as to receive the supervision of the public. After the period, the final list will be announced to the market and reported to the CSRC and the CSRC offices where the companies are located.

Q6: After the solicitation of opinions on the “Measures”, what efforts will be made to further advance the program?

A: A period of two weeks for solicitation of opinions will follow the release of the "Measures". During the period, we will also organize discussions and exchanges among market participants including listed companies, so as to learn the opinions and suggestions of all parties concerned. After the solicitation of comments, we will promptly summarize and analyze the opinions of all parties, reasonably absorb them, and officially release the "Measures" after making relevant amendments. After the official announcement of the "Measures", we will formally launch the pilot program of creating the demonstration companies for information disclosure on the basis of the annual evaluations for information disclosure of listed companies. It should be noted that the implementation of the pilot program is an important attempt made by the SSE to innovate in regulatory methods, strengthen the classified regulation, and better serve the listed companies. Recently, the new "Securities Law" has just been promulgated and will be officially implemented this year. The new "Securities Law" adheres to the concept of opening at the front end and controlling at the back end, laying the institutional foundation for the healthy operation of the capital market and reform and innovation. We will take the deepening of classified regulation as one of the specific measures for the thorough implementation of the “Securities Law”, and further advance the efforts prudently and steadily, so as to boost the continuous improvement of the quality of the listed companies in terms of systems.

Attachment: Notice on Soliciting Public Opinions on the "Implementation Measures for Pilot Program of Creating Demonstration Companies for Information Disclosure Among Listed Companies on the Shanghai Stock Exchange (Draft)"