Q&A on Revision of Delisting System
On December 31, the Shanghai Stock Exchange (SSE) released the Rules of Shanghai Stock Exchange for Listing of Stocks, the Rules of Shanghai Stock Exchange for Stock Listing on the STAR Market, the Measures of the Shanghai Stock Exchange for the Administration of Stock Trading on the Risk Alert Board, and the Implementation Measures of Shanghai Stock Exchange for the Re-listing of Delisted Companies (hereinafter collectively referred to as the “New Delisting Rules”), and the New Delisting Rules have taken effect as from the date of issuance. Regarding the release of the New Delisting Rules, an SSE official in charge of relevant businesses answered related questions.
Q1: Can you brief us on the background of the reform in the delisting system and the general guidelines for the revision of the rules?
A: As the delisting system is a vital basic system of the capital market, deepening the reform of the delisting system is a critical part of consolidating the construction of the capital market’s basic system as well as an important deployment of the CPC Central Committee and the State Council for the capital market, and plays a significant role in improving the quality of the listed companies and promoting the sound development of the capital market. In March 2020, the new Securities Law came into effect, authorizing the stock exchanges to make specific provisions on the circumstances and procedures of delisting instead of specifically stipulating the circumstances of listing suspension and termination. On October 9, the State Council issued the Opinions of the State Council on Further Improving the Quality of Listed Companies, which made it an important task to enhance the exit mechanism for listed companies, calling for improving the delisting criteria, simplifying the delisting procedures and intensifying supervision of delisting. On November 2, the Central Committee for Comprehensively Deepening 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 deepening the reform of the capital market. The Proposals of the CPC Central Committee for formulating the 14th Five-Year Plan (2021-2025) for National Economic and Social Development and the Long-Range Objectives through the Year 2035 published on November 3 also clearly proposes "establishing the regular delisting mechanism". In order to fully implement the requirements in the documents of the CPC Central Committee and the State Council, the SSE, under the leadership of the China Securities Regulatory Commission (CSRC), has taken the implementation of the new Securities Law as an opportunity to design the “smooth exit” that matches the “diversified entrances” after absorbing the earlier experience in piloting the SSE STAR Market and ChiNext, so as to reflect the basic concepts of the registration-based IPO system.
Since 2012, there have been three major reforms in the delisting system for the main board of the SSE, and initial results have been achieved in the law-based delisting, as the four systems of indicators for compulsory delisting in the categories of financial affairs, trading, compliance and major violations, have been established, the circumstances of voluntary delisting have been specified and the risk alert board has been set up to reveal delisting risks, so as to proceed with delisting in a stable manner. Since the reform began in 2012, the SSE has continued to deal with delisting in a regular manner, and dozens of companies on the SSE’s main board have terminated listing and been 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 seven SSE-listed companies have been delisted because their share prices had fallen and stayed below face value, and quite a few companies are moving on the edge of the face value-based delisting, showing that 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 following four guidelines: 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 for face value-based delisting, and introduce the indicators for market capitalization-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 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 delisting and compress the space for avoidance. Stringent supervision will be reflected in the indicators for the categories of trading, financial affairs, compliance and major violations, and especially the evasion of delisting will be curbed through the comprehensive cross application of the indicators for financial affairs. Fourth, we will simplify the delisting process and improve the efficiency of delisting. 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, in order to form a market ecosystem facilitating entrance and exit and reflecting the survival of the fittest for listed companies.
Q2: Can you elaborate on 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 sections based on the delisting circumstances, divided into four categories of compulsory delisting, including trading, financial affairs, compliance and major violations, and that 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 in the revision. First, in terms of the indicators for the category of financial affairs, the previous indicators of net profit and operating income are abandoned, and the combined financial indicator is introduced, where the net profit is negative either before or after deducting non-recurring gains and losses, and at the same time the operating income is lower than RMB 100 million. In addition, the indicators of financial affairs are also cross-applied in the following year to the companies put under delisting risk alert due to the indicators in the category of financial affairs. 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 "1-yuan delisting", and at the same time, the market value-based indicator that "the total market value of the shares on the Exchange at closing each day is less than RMB300 million for 20 consecutive trading days" is added. Third, in terms of the indicators for the category of compliance, the two kinds of circumstances where companies have major defects in information disclosure and regulated operation and reject to make corrections 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 retaining the original clauses on fraudulent issuance, fraudulent reorganization for listing and a company’s actual financial indicators triggering the delisting criteria according to the facts determined in the administrative penalty, the quantitative criteria of delisting for major financial frauds are added and clarified.
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 listed companies will have the listing terminated when they trigger the indicators for the category of financial affairs in two consecutive years; second, the delisting arrangement period for the circumstances of delisting in the category of trading is cancelled, the price limits are not set on the first day of the delisting arrangement period, and the time limit of trading for the delisting arrangement period is shortened from 30 trading days to 15 trading days; third, the start point for the continuous listing suspension in the delisting category of major violations is 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 date of the court judgment.
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 current reform in the delisting system.
Q3: The SSE publicly solicited opinions on the New Delisting Rules in the earlier stage. Can you brief us on the solicitation of opinions and the market feedback, as well as the main aspects where the adjustments and improvements have been made to the relevant business rules?
A: The reform of the delisting system represents a process of implementing the registration-based IPO system and improving the basic market system, as well as a process of forging the maximum consensus in the market and among all parties concerned. From December 14 to 28, 2020, the SSE publicly solicited opinions from the market on the revision of the four sets of rules for delisting. During the process, three symposiums were held to listen to the opinions of listed companies, securities service agencies, members of the Listing Committee and other market participants, and questionnaire surveys and other activities were organized for individual investors to learn about investors’ opinions; through emails, public hotlines, letters, media and other channels, a total of more than 290 submissions of major opinions were collected from various market players.
On the whole, the public gave positive responses to the drafts of the New Delisting Rules, believing that the revision of the delisting system will further enhance the system, contribute to improving the quality of information disclosure of the listed companies, upgrading the governance of the listed companies and pushing the listed companies to make themselves better and stronger, facilitate the development of the mechanism of survival of the fittest in the market and the rational allocation of market resources, and significantly boost the reform of the capital market and China’s construction of the socialist market economy.
At the same time, the market participants also put forward specific opinions and suggestions. For example, the suggestions on the newly added quantitative indicators for delisting due to major financial frauds mainly focused on how to set the indicators more reasonably and pertinently; the suggestions on the combined indicators of “net profit after deducting non-recurring gains and losses + operating income” were mainly concentrated on how to determine the operating incomes to be deducted in practice, how to prevent evasion, etc.; the suggestions on the cross-application of the financial indicators in the following year were mainly focused on whether including qualified opinions in the delisting indicators is too strict, etc.; the suggestions on the market value-based indicators for delisting mainly centered on whether it is necessary to set the indicators and whether the criteria are reasonable, etc.; the suggestions on the transition period arrangements mainly involved whether it is suitable for the indicators in the category of financial affairs to set 2020 as the first applicable year, etc.; and in addition, there were opinions and suggestions on strengthening protection of investors.
The SSE has carefully analyzed and studied the opinions and suggestions put forward by the market participants, and fully absorbed reasonable and feasible opinions and suggestions into relevant systems and rules. Specifically, adjustments and improvements have been made mainly in the following aspects.
First of all, the delisting criteria of “fraud amount + fraud proportion” are improved. In the feedback, some suggestions called for being strict in setting the proportion indicator and the amount indicator, reflecting the high expectations in the market for harsh punishment for financial fraud. Therefore, the New Delisting Rules have absorbed the abovementioned suggestions and reduced the fraud amount and the fraud proportion. After the adjustment, if, according to the facts determined by the CSRC’s administrative penalty decision, a company’s disclosed operating income (or net profit, total profit, balance sheet) has false records for two consecutive years, and the total discrepancy reaches more than RMB500 million, and exceeds 50% of the total amount of the corresponding annual operating income (or annual net profit, total annual profit, net assets at the end of the period) disclosed in the two years (in calculating the foregoing totals, if the relevant financial data are negative, then the absolute value shall be taken first before summation), the compulsory delisting will be imposed on the company (see specific rules for details). Compared with the draft for comments, the formal rules are more stringent in setting of indicators.
Secondly, adjustments and improvements have been made in the combination of financial indicators. The combined financial delisting indicators of “net profit after deducting non-recurring gains and losses + operating income” are newly added in the reform so as to characterize the shell companies that have lost the capacity for sustainable operation. In applying the indicators, the listing rules provide for corresponding deductions. It is suggested that for the rules in this aspect there are difficulties in the process of actual operation, as it is hard to determine which incomes should be deducted. Therefore, the New Delisting Rules further clarify that the deductions from operating incomes are "the business income that has nothing to do with the main business and the income that does not have commercial substance", and require that a company should disclose the deductions from operating incomes and the amount of operating income after the deduction in the annual report when the lower one of the audited net profits before and after deducting non-recurring gains and losses is negative, and the accountant should issue a special inspection opinion on whether the deductions from operating income are accurate, so as to clearly distinguish between accounting and auditing responsibilities.
Thirdly, the circumstances of restricting shareholding lessening for the delisting in the category of major violations are improved. It was suggested that the restrictions on the reduction of the shares held by the relevant parties of the companies with major violations for compulsory delisting should be intensified. After research, the suggestion has been adopted, and it is stipulated that specific parties such as the controlling shareholder, the actual controller, directors, supervisors and senior executives of a company that is subject to compulsory delisting for major violations shall not reduce the shareholding of the company from the date when the advance notice on relevant administrative penalty decisions or the judicial decision is issued until the listing termination and delisting of the company’s shares.
In addition, according to market feedback, the presentation of some terms has also been optimized and adjusted.
Q4: As the market participants are rather concerned about the compulsory delisting for major violations, can you give us an overview of the system of compulsory delisting for major violations?
A: In November 2018, the SSE issued and implemented the Measures for Imposing the Compulsory Delisting on the Listed Companies for Major Violations. The Measures focus on whether the relevant violations in the securities market information disclosure affect the listing status, and clarify four types of circumstances of delisting for major violations in securities, namely, fraudulent issuance in IPO, fraudulent issuance in reorganization-based listing, evasion of delisting through frauds in the annual report, and other circumstances determined by the Exchange. In the current reform, a new type of circumstance has been added, that is, the quantitative indicator of "fraud amount + fraud proportion" for delisting due to a major financial fraud. These five types of circumstances focus on whether the violations affect the company's listing status, and the relevant criteria are clear and objective, with high certainty, and can provide the market with clear expectations.
In the circumstances of compulsory delisting for major violations, as the companies committing the fraudulent issuance had flaws when they first acquired the listing status, clearing them out of the market will help safeguard the foundation of integrity for the market as a whole, and conduce to strict regulation of the entrance to the capital market; as the companies that have frauds in the annual reports to avoid delisting have concealed the fact that they have triggered the delisting indicators in the category of financial affairs and should have their listing terminated, regardless of the amount or proportion of a company’s financial fraud, they should not continue to maintain their listing status.
The main reason for adding the delisting criterion of "fraud amount + fraud proportion" in the current reform is that in practice a small number of companies had major financial frauds that seriously disrupted the market order, with huge amounts of financial fraud, lost basic integrity, and caused serious damage to investors’ confidence and the information disclosure order, with improper operation of their internal organization and ineffective internal control. Therefore, it is no longer suitable for the companies to remain in the securities market as public companies, and it is necessary to delist them to maintain the market order.
It needs to be pointed out that at present the investor protection mechanism is being further improved, and delisting is not the only way to combat fraud. Therefore, to crack down on frauds, it is necessary for a comprehensive system and multiple tools to act together. According to the severity of the fraud and the actual situation, comprehensive measures such as integrity records, regulatory measures, administrative penalties, transfer to criminal proceedings, and class action should be taken instead of delisting as the only means of dealing with all frauds. This year, the new Securities Law has substantially increased the amounts for administrative penalties. Recently, the National People’s Congress has deliberated on and passed the Amendment (XI) to the Criminal Law, which has remarkably enhanced the criminal penalties for fraudulent issuance, fraud in information disclosure and other crimes, demonstrating the country’s firm determination to crack down on the securities and futures crimes, and will significantly deter financial frauds.
Q5: Significant adjustments have been made in the released quantitative indicators for delisting due to major financial frauds. Can you elaborate on the formulation of the indicators?
A: In the current reform of the delisting system, on the premise of retaining the previous criteria of delisting for major violations, for the financial fraud cases that have large amounts and high proportions for the fraud but do not meet the delisting criteria in the previous rules, the criterion of "fraud amount + fraud proportion" has been newly added, and thus the system of delisting criteria for major violations will be further improved.
According to the opinions on the indicators solicited from the market, the market participants paid much attention and put forward relevant suggestions. Some believed that the newly-added quantitative indicators for delisting due to major financial frauds are too lenient to reflect the "zero tolerance" for fraud; but there were also opinions that delisting is an instrument for resource allocation rather than a tool of punishment, and that it is not suitable to simply delist the companies perpetrating frauds.
After an in-depth study of the suggestions from the market, the indicators of this type have been optimized and adjusted while the original intention of the indicator setting remains unchanged. First, the fraud period is reduced from 3 years to 2 years, and the total amount of fraud in two consecutive years is calculated to prevent malicious evasion; second, the fraud proportion is decreased from 100% to 50%; third, the total amount of fraud is lowered from RMB1 billion to RMB500 million; and fourth, the indicator of operating income is newly added.
"Zero tolerance" for financial fraud is a wide consensus in the market as well as a principle that the SSE has always adhered to. The SSE will continue to strictly regulate financial fraud and resolutely delist the companies that meet the delisting criteria.
Q6: There is an opinion that the compulsory delisting will be imposed on a company only if it meets the quantitative indicators of delisting for major financial frauds. Is the opinion correct?
A: The opinion is neither complete nor accurate. The quantitative indicators of delisting for major financial frauds are only one of the five types of delisting indicators for major violations in securities, and for the other four types of circumstances there is no amount indicator or proportion indicator. According to the rules for compulsory delisting due to major violations, the companies that should be delisted include those who have large amounts and high proportions of fraud, endanger people’s lives and safety, have committed fraudulent issuance through financial frauds in the IPO or reorganization-based listing, or those who evade the delisting criteria through financial frauds. Especially in the last type of circumstance for delisting, regardless of the amount of the company’s fraud and the length of the fraud period, as long as the corresponding indicators are triggered, the company will be delisted. Since the formulation and improvement of the rules for compulsory delisting due to major violations in 2014, a number of companies have been forced to delist because of major violations.
For example, the delisting risk alert is imposed on Company A as a result of a negative net asset at the end of 2020. Its real net asset at the end of 2021 is RMB -10,000, but it avoids the delisting for negative net assets in two consecutive years by inflating its net assets by RMB 20,000 through financial fraud, with a net asset of RMB 10,000 disclosed to the public. Although the amount for the company’s financial fraud is only RMB 20,000, once the financial fraud is verified by the CSRC and an administrative penalty is imposed, the company’s stock will be delisted because of triggering the indicators in Item (3) of Article 13.5.2 of the SSE’s Rules for Stock Listing.
As another example, in 2020 Company B has a negative net profit after deducting non-recurring gains and losses and an operating income of RMB 90 million. In order to avoid being put under the delisting risk alert, the company inflated its operating income by RMB 11 million. After that, the company's 2021 financial accounting report receives a qualified audit report. Since the company has in fact triggered the circumstances for listing termination in the category of financial affairs, the company's stock will be forced to delist due to major violations after the CSRC verifies the company’s fraud in the operating income and imposes administrative penalties.
As an organic whole, the delisting indicators in the categories of trading, financial affairs, compliance and major violations interact with each other. With the advancement of the pilot registration-based IPO system, more high-quality companies will be listed, and the philosophy of investment in the secondary market is changing. After a company’s financial frauds are verified, even if the company does not meet the criteria for compulsory delisting due to major violations and is not delisted, the frauds will be included in its integrity records, and the company will even be subject to administrative punishment, transferred to criminal proceedings, or face class action, and will also be labeled as a "fraudulent company". Because of the conduct without integrity and without regard to investors’ rights and interests, such companies will be abandoned and punished by the market, which will seriously affect their valuation. With the market mechanism playing a greater role and more and more companies subject to face value-based delisting at present, such companies will possibly face the judgment by investors, and may end up being delisted.
Q7: There is an opinion that the operating income indicator tends to be circumvented. What arrangements have been made in the current revision of the rules?
A: The combined indicators of “net profit after deducting non-recurring gains and losses + operating income” newly added in the reform of the delisting system point to shell companies without the capacity for sustainable operation. In order to prevent companies from using fabricated income to avoid delisting, the following arrangements have been made in the listing rules.
First, according to the requirements, the business income that have nothing to do with the main business and the income that do not have commercial substance should be deducted from the operating income when a company determines whether the indicators are triggered. The listed companies should fully disclose the deductions from the operating income and the amount of operating income after deduction in the annual report, and the company’s directors, supervisors and senior executives shall bear corresponding responsibilities.
Second, the accounting firm responsible for the audit of the annual report shall issue a special inspection opinion on whether the deductions in the company's operating income meet the requirements and whether the amount of the operating income after the deduction is accurate.
Third, if a company fails to deduct the relevant income in accordance with the rules, the SSE may require the company to do so and decide whether to impose the delisting risk alert on the company on the basis of the operating income after the deduction.
In regulatory practice, the SSE will take measures as appropriate regarding a company’s deduction from the operating income such as conducting on-site inspections and requesting inspections by other regulatory institutions, so as to ensure the implementation of the rules.
Q8: The delisting indicators in the category of financial affairs have changed a lot in the revision. What are the main considerations for replacing single financial indicators with combined financial indicators?
A: Before the current reform, the previous indicator of net profit played an important role in the practice of delisting. As it is an important market orientation for listed companies to generate returns for investors, a number of companies that were unprofitable for long have been cleared out of the market. With the philosophy of the registration-based IPO system increasingly accepted, profitability is no longer the only criterion for measuring the value of a company, and it is impossible for the original single indicator of net profit to fully reflect a listed company’s capacity for sustainable operation. On the basis of summarizing practical experience, the combined indicators of net profit after deducting non-recurring gains and losses and operating income are newly added in the current reform, and through multi-dimensional characterization, the companies that are continuously at losses and have revenues of less than RMB100 million are identified. As a result, a listed company’s capacity for sustainable operation is represented more accurately. At the same time, it is clarified that the lower one of the net profits before and after deduction of non-recurring gains and losses should be adopted as the net profit, which solves to some extent the long-standing problem that the companies used external subsidies, asset sales and other earnings management means to avoid delisting. After the reform, the companies that have no main business for a long time and continuously rely on government subsidies or asset sales to protect their shell status will face the risk of stock delisting; and the high-tech companies that have normal operation of the main business but have not yet begun to make profits, or the companies that are temporarily at a loss due to industry cycles, will no longer face the risk of stock delisting. In fact, the newly-added combined financial indicators were adopted in the earlier pilot reform of the SSE STAR Market, and the current reform is actually a replication and promotion of the previous reform.
Q9: 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 those 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 shares can still avoid being delisted. The situation has been criticized by 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 audit opinions are included into the delisting indicators for the category of financial affairs, and are also cross-applied with other indicators for financial affairs, so as to further strengthen the implementation of delisting. For example, if a listed company triggers any one of the indicators, including negative net asset, the combined indicator of net profit and operating income, or the indicator of audit opinion in the first year, its shares will be put under the delisting risk alert. In the following year, if any one of the indicators, including net asset and the combined indicator of net profit and operating income, is evaded through fraud, as long as the annual report receives qualified opinion, disclaimer of opinion or adverse opinion, the company’s listing of shares will be terminated directly, thus completely eliminating the space for evasion.
Q10: We have noticed that in the current reform the rules for the "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 7 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 deepening of the reform of the registration-based IPO system, market valuation has gradually become more reasonable, and the cases of face value-based delisting are on the rise, which is the result of the judgment by investors 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, improper governance or serious violations, and there were also cases where some companies blindly expanded the share capital while their operating fundamentals fell behind, resulting in the 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 different actual situations of setting the face value of stocks by different companies, in the current reform the "face value" in the previous delisting indicators has been clearly defined as "RMB 1 yuan".
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, a new delisting circumstance is added in the current reform, where “the market value of a listed company on the SSE is below RMB 300 million at market close on 20 consecutive trading days”. Market value is the result of adequate interaction in the market. Companies whose market cap is very low tend to lack investment value and be speculated on. According to the current development of the capital market, removing the companies with extremely low market value from the market will encourage investors to make rational choices, lead to value investment, and help achieve the survival of the fittest in the market.
Q11: 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 the beginning of 2020, the Financial Stability and Development Committee under the State Council has reiterated the "zero tolerance" for the violations and crimes 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. In regulatory practice, we have found that a small number of listed companies have a long and notorious history of violating laws and regulations in information disclosure and operation. Although the severity has not yet reach the level of major violations, these companies refuse to make corrections despite repeated education, resulting in a baneful influence on the market. If the situation continues, not only will the interests of investors be harmed, but also will the order be disrupted, which is detrimental to the healthy development of the market. To this end, in order to implement the requirements in the documents of the central government, in the current reform a new delisting indicator of "significant defects in information disclosure or regulated operation" has been added. The specific circumstances include when the stock exchange loses effective sources of information on the company, or when the company refuses to disclose important information that should be disclosed, seriously disrupting the order of information disclosure and having bad influence. If a listed company has the abovementioned violations and refuses to make corrections, it will be resolutely removed from listing. Presumably, adding such delisting indicators will enrich to a certain extent the exchange’s "toolbox" for daily regulation and enhance the deterrence of regulation.
Q12: In the current reform, what are the main specific measures for strictly implementing 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. The current 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 investors, companies, the market and the public, specific and executable quantitative criteria have been 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 those for the category of audit opinion will be cross-applied in the following year; and third, in the calculation of the combined indicators for the category of financial affairs, stricter requirements have been made for determining the operating income, as in calculating the "operating income", the income irrelevant to the main business or 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 non-recurring gains and losses but weak in sustainable operation, the circumstances for the application of other risk alerts have been appropriately expanded to include situations where “the net profits either before or after deducting the non-recurring gains and losses are negative in all three most recent fiscal years, and the audit report on 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 receives audit report of adverse opinion or disclaimer of opinion, or the audit report on internal control is not disclosed as required".
Q13: In the current reform what are the main changes in the Rules for Listing of Stocks on the SSE STAR Market?
A: During the earlier reform in establishing the SSE STAR Market and Piloting the registration-based IPO system, the SSE STAR Market adhered to the basic guideline of strictly implementing the delisting system, set up the basic framework of the existing delisting system, formed a system of delisting indicators in four categories including major violations, trading, financial affairs and compliance, replaced the single delisting indicator of continuous loss with a combination of financial indicators, and added the delisting indicator for the category of trading that the market value is continuously below the prescribed criterion; the delisting procedures were simplified, and the processes of listing suspension and resumption were cancelled, as the companies that should be delisted would have the listing terminated directly; regarding the circumstance where a small number of companies are likely to avoid delisting through transactions without commercial substance, the deductions in the operating income were clarified. On the basis of the existing delisting system, the current revision of the Rules for Listing of Stocks on the SSE STAR Market is characterized by the further improvement of delisting indicators and optimization of delisting procedures, mainly in the following aspects.
First, in terms of delisting indicators, the cross-application of the indicators for the category of financial affairs is enhanced, the mechanism of deduction for operating income is optimized, the quantitative indicators for delisting due to major financial fraud are set up, and the indicator for the category of compliance that more than half of the directors are unable to ensure the authenticity of the annual report or semi-annual report is newly added, so as to strictly remove the companies with "hollowed" main business, severely crack down on financial frauds, tighten the market discipline, and give further play to the role of the delisting system in promoting the survival of the fittest in the market and improving the quality of listed companies.
Second, in terms of delisting procedures, it is clarified that the stocks that have the listing terminated due to the delisting circumstance in the category of trading will not enter the trading for the delisting arrangement period, and the delisting arrangement period for other circumstances will be shortened from 30 trading days to 15 trading days to further simplify the delisting process. Meanwhile, the price limit on the first day of the delisting arrangement period will be lifted.
In addition, the stocks put under the delisting risk alert will still be traded in accordance with the stock trading mechanism for the SSE STAR Market, but a limit of 500,000 shares is set for the total purchase of an investor through auction trading, block trading and after-hours fixed-price trading in a day.
Q14: When will the revised rules for delisting be officially implemented? Can you brief us on how to deal with the transition between the old and new rules?
A: The revised rules for delisting will take effect on the date of release. 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 transition between old and new rules. The specific arrangements are as follows:
1. For the companies that were suspended from listing before the enforcement of the new Rules for Listing, the SSE will apply the original Rules for Listing to determine whether to resume or terminate the listing of the company's shares, and the original Rules for Listing and the original supporting business rules to implement the relevant procedures for listing resumption or termination.
2. For the companies that were not suspended from listing before the enforcement of the new Rules for Listing, when the circumstances of compulsory delisting in the category of financial affairs specified in Article 13.3.2 of the new Rules for Listing are applied, the year 2020 shall be the first year for calculation; when the circumstances of compulsory delisting for major violations in information disclosure specified in Item (4) of Article 13.5.2 of the new Rules for Listing are applied, the year 2020 shall be the first year for calculation.
3. For the companies put under the delisting risk alert because of triggering the circumstances specified in Article 13.2.1 of the original Rules for Listing before the enforcement of the new Rules for Listing, and the companies put under other risk alerts, before the disclosure of the companies’ 2020 annual reports, the SSE will continue to impose the delisting risk alert or other risk alerts on their stocks; after the disclosure of the companies’ 2020 annual reports, the SSE will apply relevant provisions of the new Rules for Listing to determine whether to impose delisting risk alert or other risk alerts on their stocks.
4. For the companies that, after the disclosure of the 2020 annual reports, record continuous losses from 2018 to 2020 but have not triggered the circumstances of compulsory delisting in the category of financial affairs under Article 13.3.2 of the new Rules for Listing, the SSE will impose other risk alerts on their stocks; after the disclosure of the companies’ 2021 annual reports, the SSE will apply the relevant provisions of the new Rules for Listing to decide whether to revoke the other risk alerts imposed on their stocks.
5. The indicators for the market value-based delisting specified in Item (5) of Article 13.2.1 of the new Rules for Listing shall come into effect on July 1, 2021. For the stocks with a closing price of less than RMB 1 yuan on December 31, 2020, when the relevant provisions of Article 13.2.1 of the new Rules for Listing are applied, the trading days when the closing price of the stock is continuously lower than RMB 1 yuan before and after the enforcement of the new Rules for Listing shall be counted continuously; for the stocks of the companies that register a closing price of less than RMB 1 yuan every day for 20 consecutive trading days according to the counting based on the aforementioned circumstances and have the listing terminated, the original Rules for Listing and the original supporting business rules shall apply to the relevant arrangements for the delisting arrangement period.
6. If a company receives the CSRC’s advance notice of administrative penalty after the implementation of the new Rules for Listing 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 under the original Measures for Imposing Compulsory Delisting on Listed Companies for Major Violations, the SSE 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 from 2020 on to actually trigger the circumstances of compulsory delisting for major violations according to the new Rules for Listing, the SSE will impose the compulsory delisting for major violations on its shares.
7. When the circumstances of other risk alerts specified in Items (3) and (6) of Article 13.9.1 of the new Rules for Listing apply to the listed companies, the year 2020 shall be the most recent fiscal year, and the years from 2018 to 2020 shall be the three most recent consecutive fiscal years.
Q15: 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 cleaning up business rules, and simplified the existing system of delisting rules. After the revision, the system of delisting rules for the main board has been simplified from the structure of “1 + 4” to that of “1 + 2”, that is, one set of Rules for Listing of Stocks 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 following three 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 stock buyback and major shareholders increasing their shareholding in accordance with the law, the current revision stipulates the special situation that “the listed companies that implement the buyback or whose shareholders holding more than 5% of the shares increase their shareholding according to the disclosed plans” are not subject to the 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 in the delisting arrangement period tend to see sharp price fluctuations. Lifting the first-day price limit will improve the pricing efficiency, promote the full interaction in the market, and facilitate the exit of investor in a timely manner. Third, we have implemented the revisions in the new Securities Law regarding the IPO conditions, and accordingly 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."
Q16: What arrangements does the SSE have for the follow-up implementation of the current reform in the delisting system?
A: The release of the New Delisting Rules marks a new level in the reform of the delisting mechanism characterized by market orientation, rule of law and normalization, represents another significant achievement in deepening the reform of the capital market and improving the basic market system against the background of implementing the new Securities Law and piloting the registration-based IPO system, and contributes to further maintaining the order of the securities market and protecting the legitimate rights and interests of small and medium-sized investors. Going forward, the SSE will earnestly implement the guideline of “building the system, non-intervention, and zero tolerance” and the work requirements for “standing in awe of the market, the rule of law, expertise and investors, and forging synergy in comprehensive support for reform, development and stability of the capital market”, resolutely shoulder the main responsibility and strictly regulate delisting, resolutely implement all the requirements in the delisting system, adhere to the principle of removing all companies that should be delisted, resolutely clear out the companies that meet the delisting conditions, especially those that have severe violations or that seriously disrupt the market order. The SSE will accelerate the formation of a market ecosystem characterized by survival of the fittest, advance the improvement of quality of listed companies, and better support the high-quality development of the national economy.
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