Q&A on SSE's Revision of Delisting System
Today, the Shanghai Stock Exchange (SSE) issued the draft versions of the Rules of Shanghai Stock Exchange for Listing of Stocks, the Rules of Shanghai Stock Exchange for Listing of Stocks on the Science and Technology Innovation Board, the Measures of Shanghai Stock Exchange for Management of Stock Trading on the Risk Alert Board, and the Implementation Measures of Shanghai Stock Exchange for the Relisting of the Delisted Companies (Hereinafter collectively referred to as the "New Delisting Rules"), for public comments. Regarding the release of the drafts of the New Delisting Rules, an SSE official in charge of relevant businesses has answered related questions.
Q1: What is the background of the reform in the delisting system and what are the general guidelines for the revision of the rules?
A: As a basic system of the capital market, the delisting system for listed companies plays an important role in improving the quality of listed companies, enhancing the survival of the fittest mechanism in the market, and allocating market resources in a coordinated way. In November 2018, CPC General Secretary Xi Jinping announced to establish the Science and Technology Innovation Board (STAR Market) and pilot the registration-based IPO system on the SSE. On the one hand, the pilot program of the registration-based IPO system has advanced the reform of the delisting system as an exit for the capital market; on the other hand, it has also resulted in higher requirements for the improvement of the basic systems. Toward this goal, on the basis of previous reforms in the delisting system, the SSE STAR Market has taken the lead to make a step forward in institutional trials by tightening the delisting criteria, improving the delisting indicators and simplifying the delisting procedures, so as to provide experience in rules and accumulation of systems for the new round of reforms in delisting. The new Securities Law, which came into effect in March 2020, absorbs the results of the reform on the SSE STAR Market, and puts the stock exchanges in charge of making specific provisions on delisting conditions and procedures instead of providing specific rules for the circumstances of listing suspension and termination. The listed and traded securities with the circumstances of listing termination prescribed by the stock exchange shall have the listing and trading terminated by the stock exchange in accordance with the business rules. On October 9, the State Council issued the Opinions of the State Council on Further Improving the Quality of Listed Companies, which makes it an important task to improve the exit mechanism for listed companies, calling for enhancing the delisting criteria, simplifying the delisting procedures and intensifying the supervision of delisting. On November 2, the Central Committee for Strengthening Overall Reform deliberated on and approved the Implementation Plan for Improving the Delisting Mechanism for Listed Companies, which reiterates that improving the delisting mechanism for listed companies is an important institutional arrangement for comprehensively cementing the reform of the capital market. The Recommendations of the CPC Central Committee for Formulating the 14th Five-Year Plan for Economic and Social Development and the Long-Range Goals for 2035 published on November 3 also clearly proposes "establishing the normalized delisting mechanism". In order to fully implement the spirit of the documents of the CPC Central Committee and the State Council, the SSE, under the leadership of the China Securities Regulatory Commission (CSRC), initiated a new round of reform of the delisting system in a timely manner.
Since 2012, there have been three major reforms in the delisting system on the SSE's main board market, as the system of indicators for compulsory delisting in the four categories of financial affairs, trading, standardization and major violations and the circumstances of voluntary delisting have been set up, and the risk alert board has been established to reveal the risks of delisting, in a bid to advance the steady delisting. Initial results have been achieved in the progress in law-based delisting. Since the reform began in 2012, the SSE has continued to deal with delisting in a normal manner, and dozens of companies on the SSE's main board have had the listing terminated and the shares delisted. In the past two years, since the registration-based IPO system was piloted, the face value-based delisting has gradually become the main channel for delisting, as six SSE-listed companies have been delisted due to their share prices continuously falling below the face value, and quite a few companies are moving on the edge of the face value-based delisting, showing that the market-oriented delisting is taking effect.
Adhering to the basic principle of orientation toward market, rule of law and normalization, the current reform in the delisting system follows the guidelines in the following four aspects: First, we will stick to the market orientation and conform to the reform concept of the registration-based IPO system. We will improve the indicators of face value-based delisting, and newly add the indicators of market value-based delisting to give play to the role of the market in terms of survival of the fittest. Second, we will enhance the criteria for financial affairs-based delisting, and strive to eliminate the shell companies. Instead of only assessing the delisting indicator of net profits in the past, the current reform is characterized by the combined indicators of operating income and net profit after deducting non-recurring gains and losses, so as to provide an accurate profile of a shell company. Third, we will strictly enforce the delisting and compress the space for avoidance. Stringent supervision will be reflected in the indicators for the categories of trading, financial affairs, standardization and major violations, and especially the evasion of delisting will be curbed through the cross application of the indicators for financial affairs and those for audit opinions. Fourth, we will simplify the delisting process and improve the efficiency of delisting. The procedures of listing suspension and listing resumption have been cancelled to speed up the pace of delisting. In general, the important arrangements of the CPC Central Committee and the State Council for the capital market have been firmly implemented, and the spirit of the new Securities Law has been strictly enforced in the current reform, as the delisting indicators are further optimized, the delisting process is shortened, the market clearing is stepped up, and the delisting efficiency is improved, with a view to forming a market ecosystem facilitating the entrance and exit as well as the survival of the fittest for the listed companies.
Q2: Can you elaborate the current reform in the delisting system? What are the specific changes to the delisting criteria and procedures?
A: Regarding the delisting criteria, first of all, in the revision the compilation method for the section on delisting in the Rules for Listing of Stocks is optimized, as the structure of provisions is adjusted from the original one based on the delisting procedures to that including the sections based on the delisting circumstances, that is, the delisting circumstances are divided into those of compulsory delisting in the four categories of trading, financial affairs, standardization and major violations and those of voluntary delisting, and the corresponding delisting circumstances and the complete implementation procedures for delisting are specified in the sections for each kind of delisting circumstances. Secondly, the indicators for the four categories of compulsory delisting are improved: First, in terms of the indicators for the category of financial affairs, the original only indicators of net profit and operating income have been cancelled, and the combined financial indicators of negative net profits before and after deducting non-recurring gains and losses and less than RMB100 million in the operating income are newly added, and are also cross-applied to the indicators of financial affairs for the year following the implementation of the delisting risk alert. Second, in terms of the indicators for the category of trading, the original delisting indicator based on the face value is replaced by the indicator of "RMB 1 delisting", and at the same time, the market value-based indicator that "the total market value of the shares at the closing each day on the Exchange is less than RMB 300 million for 20 consecutive trading days" is added; third, in terms of compliance indicators, the two kinds of circumstances where companies have major defects in information disclosure and regulated operation and reject to comply and more than half of the directors fail to ensure the authenticity of the semi-annual report or the annual report are added, with specific criteria elaborated; fourth, in terms of the indicators for the category of major violations, on the basis of the original sub-category of delisting for major violations in information disclosure, the delisting criteria for financial fraud are further clarified, with the quantitative indicators newly added, which stipulate that "according to the facts ascertained in the CSRC's administrative penalty decision, the annual report disclosed by the company contains false records, misleading statements or major omissions, the amount of the inflated net profit of the listed company in each year is more than 100% of the amount of net profit disclosed in the year's annual report for three consecutive years, and the total amount of the inflated net profits in the three years reaches more than RMB 1 billion; or the total amount of inflated profits in each year is more than 100% of the amount of profits disclosed in the year's annual report for three consecutive years, and the total amount of the inflated profits in the three years reaches more than RMB 1 billion; or the total amount of false records in all items of the balance sheet in each year is more than 50% of the amount of the net assets disclosed in the year's annual report for three consecutive years, and the cumulative amount of false records in the three years totals more than RMB 1 billion (if the figures involved in the aforementioned indicators are negative, the absolute value should be adopted in calculation)".
In terms of delisting procedures, the current revision mainly includes the adjustments in the following three aspects: first, the procedures of listing suspension and listing resumption are cancelled, and it is stipulated that the listed companies will have the listing terminated when they trigger the indicators for the category of financial affairs in two consecutive years; second, the setting of delisting arrangement period for the circumstances of delisting in the category of trading is cancelled, the price limits will not be set on the first day of the delisting arrangement period, and the time limit of trading for the delisting arrangement period will be shortened from 30 trading days to 15 trading days; third, the start point for the continuous listing suspension in the category of major violations will be delayed from the date of receipt of the advance notice on administrative penalty or the court's judgment to the date of receipt of the administrative penalty decision or the effective judgment of the court.
In addition, based on the previous explorations in the systems, the SSE STAR Market has had the delisting indicators and procedures optimized at the same time in accordance with the overall requirements for the reform in the delisting system. First, the indicators of the delisting for the category of major violations are further improved, and the quantitative criteria for judgment are introduced; second, the cross-application of the indicators for the category of financial affairs and the indicators for the category of audit opinions is also implemented, with the delisting criteria tightened; third, the delisting arrangement period resulting from triggering the indicators for the category of trading is cancelled, with the time for delisting reduced; fourth, to link up with the listing conditions, the delisting criteria for red-chip listed companies are supplemented.
Q3: The delisting indicators for the category of financial affairs have been revised and changed significantly. What are the main considerations for replacing the single financial indicator with the combined financial indicators?
A: Before the current reform, the original indicator of net profit played an important role in the practice of delisting. It is an important market direction for the listed companies to generate returns for investors, and a number of companies that were at a loss for a long time have been cleared out of the market. With the concept of the registration-based IPO system increasingly recognized, profitability is no longer the only criterion for measuring the value of a company, and the original single indicator of net profit could not fully reflect a listed company's capacity for sustainable operation. Based on summarizing the practical experience, a combination of financial indicators including the net profit and the operating income is added in the current reform, so as to identify the companies that continue to be at a loss and record revenues of less than RMB 100 million through multi-pronged demonstration, as well as more accurately represent a listed company's capacity for sustainable operation. In addition, it is confirmed that the lower value of the net profits before and after deduction of non-recurring gains and losses shall be adopted, which has solved to some extent the long-standing problem that the companies avoid delisting through "external blood transfusion", asset sales and other earnings management means. After the reform, the companies, which have no main business for a long time and continue to protect their "shells" by relying on government subsidies or selling assets, will face the risk of having their stocks delisted; and the high-tech companies that run their main businesses in a normal manner but have not yet begun to make profits, or the companies that are at a loss for the time being due to industry cycles, will no longer face the risk of having their stocks delisted. In fact, the combination of financial indicators newly added in the current reform were adopted in the pilot reform on the SSE STAR Market in the earlier stage, and the current reform is actually characterized by the replication and promotion of the experience in the previous reform.
Q4: After the current reform, for the companies that are put under the delisting risk alert due to the indicators for the category of financial affairs, the indicators for the category of financial affairs and the indicators for the category of audit opinions will be cross-applied in the following year. What are the main considerations in this regard?
A: In the past practice of delisting, after a listed company has had the delisting risk alert issued due to two consecutive years of losses or negative net assets, it may take advantage of the loopholes of rules through various "financial tricks" in the next fiscal year to achieve the "financial statement-targeted" profits. Even if in the annual auditing the accounting firm issued an audit report with disclaimer of opinion to a company due to the aforementioned circumstances, the company's stocks can still avoid the delisting. The situation has been criticized in the market. In order to implement the requirements for severely cracking down on malicious evasion of delisting in the Opinions of the State Council on Further Improving the Quality of Listed Companies, in the current reform the delisting indicators for the sub-category of audit opinions are included into the delisting indicators for the category of financial affairs, and are also cross-applies with other indicators for financial affairs, so as to further intensify the implementation of delisting. For example, if a listed company triggers the combination of indicators including negative net assets, net profit and operating income, or any of the indicators for the sub-category of audit opinions in the first year, its shares will be put under the delisting risk alert. In the following year, if one in the combination of indicators including negative net assets, net profit and operating income is triggered again, or the qualified opinions, disclaimer of opinion or adverse opinions are issued to the annual report, the company's shares will have the listing terminated directly, thus completely eliminating the space for evasion.
Q5: We have noticed that in the current reform the rules for "face value-based delisting" that have been widely discussed in the market recently have also been optimized and adjusted, with the market value-based delisting indicators newly added. Can you brief us on the specific reasons behind it?
A: In the past two years, a total of 6 SSE-listed companies have been delisted as their stock prices were continuously lower than the face value, which has been widely recognized by all parties concerned in the market. With the implementation of the reform of the registration-based IPO system deepened, market valuations have gradually become more reasonable, and the cases of the face value-based delisting are on the rise, which is the result of the investors' "voting with their feet" and an important manifestation of the market playing a decisive role and the continuous restoration of the market ecosystem. From the perspective of practice, the companies delisted earlier because of the face value were all poorly performing ones or problem-plagued ones widely known in the market to have bad management, irregular governance or serious violations, and there were also circumstances where some companies blindly expanded the capital and saw their operating fundamentals fall behind, resulting in lack of investment value. Therefore, in the current market environment, in order to ensure the fairness and seriousness of the application of the rules, the exiting indicator of stock price has been maintained in the current reform. At the same time, considering the actual situation of the companies' different settings for the face value of stocks, in the current reform the "face value" in the original delisting indicators has been clearly defined as "RMB 1".
In order to further enrich the circumstances of delisting in the category of trading and give full play to the function of market-based delisting, the delisting circumstance where "a listed company sees its total market capitalization on the SSE according to the closing price each day stand at less than RMB 300 million in 20 consecutive trading days" is newly added in the current reform. Market value is the result of the full game of the market. The companies with small and micro market value tend to lack investment value and get trapped in the trouble of speculation. According to the current development of the capital market, clearing the companies with extremely low market value out of the market will facilitate the investors' rational choices, guide the value investment and advance the realization of the survival of the fittest in the market.
Q6: In the current reform, the delisting indicator of defects in information disclosure and regulated operation is newly added. Can you give us some details?
A: Since this year, the Financial Stability and Development Committee under the State Council has reiterated the "zero tolerance" for the violations in the capital market. The Opinions of the State Council on Further Improving the Quality of Listed Companies once again clarifies the requirement to impose tougher punishments on the violations in information disclosure. During the process of regulation, we found that a small number of listed companies had long violated laws and rules with notorious records in information disclosure or regulation operation. Although the severity has not yet reached the level of major violations, the companies refused to make corrections, even in the situation of repeated urges, resulting in bad influences in the market. If the situation continues, not only will the interests of investors be harmed, but also the normal operating order will be disrupted, which is not conducive to the healthy development of the market. To this end, in order to implement the spirit of the documents of the central authorities, in the current reform a new delisting indicator of "significant defects in information disclosure or regulated operation" has been added. The specific circumstances are as follows: the stock exchange loses the company's effective information sources; and the company refuses to disclose important information that should be disclosed, seriously disrupting the order of information disclosure, and causing bad effects. If a listed company has the abovementioned violations and refuses to make corrections, it will be definitely cleared out. Presumably, adding such delisting indicators will enrich to a certain extent the exchange's "toolbox" for regular supervision and enhance the deterrence of regulation.
Q7: In the current reform, what are the main specific measures to strictly implement the delisting system?
A: It is the consistent position and attitude of the SSE to be active in assuming the main responsibility for delisting affairs and be strict in implementing the delisting system. This reform mainly involves the following measures for strictly implementing the delisting system: first, for the delisting in the category of major violations, in order to fully respond to market concerns and comprehensively consider the impact of major violations on the investors, the companies, the market and the public, the specific and executable quantitative criteria have been newly added in the revision, in a bid to clear the "black sheep" with serious financial frauds out of the market; second, for the companies that are put under the delisting risk alert due to indicators for the category of financial affairs, the indicators for the category of financial affairs and the indicators for the category of audit opinions will be cross-applied in the following year; and third, in the calculation for the combination of indicators for the category of financial affairs, stricter requirements have been made for determining the operating income, as in calculating the "operating income", the incomes that have nothing to do with the main business and the incomes from the related party transactions without commercial substance should be deducted.
In addition, in order to further accurately reveal the risks of the companies that have long been profitable through the non-recurring gains and losses and other means but weak in sustainable operation, the circumstances for the application of other risk alerts have been appropriately expanded, as the circumstances for the application of other risk alerts have been newly added, namely, "the lower one of the net profits before and after deducting the non-recurring gains and losses is negative in the most recent three fiscal years, and the audit report in the financial accounting report for the most recent fiscal year shows that there are uncertainties in the company's capacity for sustainable operation" and "in the most recent fiscal year the internal control has the audit report with the adverse opinion or disclaimer of opinion issued, or the audit report on internal control is not disclosed as required".
Q8: When will the revised rules for delisting be officially implemented? Can you brief us on how to deal with the linkage between the old and new rules?
A: In the current reform, we have fully considered the objective necessity of a smooth transition in the market, and in accordance with the principle of "treating existing and newly added companies differently without retroactivity", certain buffer periods are given to the market for the connection of new and old rules. The specific arrangements are as follows:
1. If the listing was suspended before the implementation of the new rules, the old rules shall be applied subsequently in determining whether the listing should be resumed or terminated, and the old rules shall be applied in implementing the follow-up procedures such as the delisting arrangement period.
2. If the listing was not suspended before the new rules come into effect, the rules shall be applied for the delisting indicators in the category of financial affairs with the 2020 annual report as the first year for calculation; for the indicator of "fraud amount + fraud proportion" in the compulsory delisting for major violations in information disclosure added in the new rules, the rules shall be applied with 2020 as the first year for calculation. According to the abovementioned arrangements, 2020 is the first applicable year for the delisting indicators in the category of financial affairs. The companies that see their 2020 annual reports trigger the indicators in the new rules will be put under the delisting risk alert; if the 2021 annual report still triggers the relevant indicators, the listing will be terminated.
3. For the companies put under the delisting risk alert because of triggering the indicators for the category of financial affairs before the implementation of the new rules, and the companies put under other risk alerts, the delisting risk alert or other risk alerts shall be implemented continuously before the company discloses the 2020 annual report, and after the disclosure of the 2020 annual report, we will determine whether to implement the delisting risk alert or other risk alerts in accordance with the new rules; if the criteria for listing suspension are met according to the old rules but those for the delisting risk alert are not triggered according to the new rules, the other risk alerts will be imposed on the shares, with the new rules to be enforced after the disclosure of the 2021 annual report, and if the circumstances of other risk alerts under the new rules are not triggered, the other risk alerts will be revoked.
4. The newly added indicators for the market value-based delisting will be implemented 6 months after the promulgation of the new rules; for other indicators for compulsory delisting in the category of trading, in counting the number of the days when the company continuously triggers the indicators, the number of the days of triggering the indicators before and after the implementation of the new rules shall be counted continuously.
5. For the companies that received the CSRC's prior notice of administrative penalty or administrative penalty decision before the implementation of the new rules, and may trigger the circumstances of compulsory delisting for major violations according to the old rules, the old rules shall apply to the company's matters of compulsory delisting for major violations.
If a company receives the CSRC's prior notice of administrative penalty after the implementation of the new rules and may trigger the circumstances of compulsory delisting for major violations, and the facts identified in the follow-up administrative penalty decision cause the company's financial indicators for any consecutive years from 2015 to 2020 to actually trigger the circumstances of compulsory delisting for major violations according to the old rules, the exchange will impose the compulsory delisting for major violations on its shares; and if the facts cause the company's financial indicators for any consecutive years in 2020 and the following years to actually trigger the circumstances of compulsory delisting for major violations according to the new rules, the exchange will impose the compulsory delisting for major violations on its shares. For example, according to the facts identified in the administrative penalty decision, a company records negative net assets continuously in 2019 and 2020, which triggers the circumstance of delisting where the net assets are negative for two consecutive years according to the new rules, but as the application of the new rules starts in 2020, the circumstance will not result in the compulsory delisting for major violations.
6. In judging whether a company has triggered the circumstances of other risk alerts stipulated by the new rules, 2020 shall be the most recent fiscal year, and the years from 2018 to 2020 shall be the most recent three consecutive fiscal years.
Q9: In the current reform of the delisting system, what changes have been made to the supporting business rules?
A: In the revision of the delisting rules, the SSE has further implemented the relevant requirements for overhauling the business rules, and "slimmed" the existing system of delisting rules. After the revision, the system of delisting rules on the main board was simplified from the structure of "1 + 4" to that of "1 + 2", that is, one set of Rules for Stock Listing plus 2 sets of supporting business rules (the Measures for Administration of Stock Trading on the Risk Alert Board and the Implementation Measures for the Re-listing of Delisted Companies). The SSE STAR Market has had relevant content incorporated into the Rules for Stock Listing on the SSE STAR Market, and the revised delisting system is mainly found in the Rules for Stock Listing on the SSE STAR Market.
In the meantime, the amendments to the supporting rules mainly cover the content in the following 3 aspects: First, the exceptions for the application of the rules for daily stock trading limit on the risk alert board are clarified. Considering that the companies under the risk alert, like normal listed companies, also have objective and reasonable needs such as buyback and major shareholders increasing their shareholdings in accordance with the law, the current revision stipulates that "the listed companies that implement the buyback or see the shareholders holding more than 5% of the shares increase their shareholdings according to the disclosed plans for increasing holdings" are not subject to the special circumstance of purchase limit of 500,000 shares. Second, the rules of no price limit for the stocks on the first day of trading during the delisting arrangement period are newly added. The stocks of the companies to be delisted tend to see the prices fluctuate sharply after entering the trading for delisting arrangement. Lifting the first-day price limit will improve the pricing efficiency, promote the full game of the market, and facilitate the investors' efforts to exit in a timely manner. Third, we have implemented the amendments in the new Securities Law regarding the IPO conditions, and simultaneously revised the requirements for relisting application, that is, the original provision that "the company, and the directors, supervisors and senior management personnel have no major violations in the past three years, and there is no false record in the financial accounting report" is revised to "the company and its controlling shareholder and actual controller have not committed the criminal offences of corruption, bribery, embezzlement of property, misappropriation of property or disrupting the order of the socialist market economy in the past three years."
Q10: What arrangements does the SSE have for the follow-up implementation of the current reform in the delisting system?
A: In the follow-up implementation, the SSE will, according to the unified deployment of the CSRC, extensively listen to the opinions in the market through multiple means. After the solicitation of opinions, the SSE will promptly complete the revision and improvement of the Rules for Stock Listing, the Rules for Stock Listing on the SSE STAR Market and related supporting business rules based on the results of the solicitation of comments, and formally release and implement the rules with the approval of the CSRC.
The SSE will be active in assuming the main responsibility for delisting and strict in supervising the delisting, resolutely implement the requirements in the delisting system, adhere to the principle of eliminating all those that should exit, determine to clear out the companies that meet the delisting conditions, especially those having major violations or seriously disrupting the market order, accelerate the formation of a market ecosystem characterized by survival of the fittest, advance the improvement of the quality of listed companies, and better support the high-quality development of the national economy.
Notice of Soliciting Opinions on the Revision of the Rules of Shanghai Stock Exchange for Stock Listing, the Rules of Shanghai Stock Exchange for Stock Listing on the SSE STAR Market and Related Supporting Rules for Delisting