Focus on: Listing and Trading of GDRs on SIX Swiss Exchange by Chinese Companies

VISCHER

Introduction

On 28 July 2022, the first four Chinese companies listed global depositary receipts (“GDRs”) in accordance with the Standard for Depositary Receipts on SIX Swiss Exchange via the China-Switzerland Stock Connect program and started trading in the newly introduced segment of GDRs. This was the first time GDRs had been listed on SIX Swiss Exchange but by 19 April 2023 nine more Chinese companies had followed suit. These transactions attracted extensive Swiss, Chinese and global financial media coverage. Prospects are positive that many more listed Chinese companies will list GDRs on SIX Swiss Exchange later this year.

Background

In June 2019, the so-called Shanghai-London Stock Connect Program was launched in order to facilitate a new level of capital cooperation between the People’s Republic of China (“China”) and the United Kingdom. On 11 February 2022, the China Securities Regulatory Commission (“CSRC”) expanded the Shanghai-London Stock Connect Program to include the Shenzhen Stock Exchange, as well as the SIX Swiss Exchange and German stock exchanges. Then, on 25 July 2022, the Swiss Financial Market Supervisory Authority FINMA approved a respective revision of the Listing Rules of SIX Exchange Regulation AG (“SIX Listing Rules”) and the introduction of a new designated GDR trading segment on SIX Swiss Exchange.

This all paved the way for the listing and trading of GDRs on SIX Swiss Exchange via the China- Switzerland Stock Connect Program (see below). The effects of this were quickly evident with several Chinese listed companies announcing their intention to raise funds through listing and trading GDRs on SIX Swiss Exchange.

China-Switzerland Stock Connect Program

The China-Switzerland Stock Connect Program enables Chinese companies listed on the Shenzhen Stock Exchange or the Shanghai Stock Exchange to list and trade GDRs representing their domestic shares (“A Shares”) on SIX Swiss Exchange (the focus of this article) and, vice versa, it allows Swiss listed companies to obtain a listing of Chinese depositary receipts in China.

Under the China-Switzerland Stock Connect Program investors are able to buy GDRs on SIX Swiss Exchange or another legitimate trading venue in the normal manner or (subject to Chinese law restrictions applicable to foreign investors) instruct a designated broker to buy A Shares on the Shenzhen Stock Exchange or the Shanghai Stock Exchange (where the A Shares are listed). They would then instruct the depositary to create GDRs representing such A Shares (subject to the cap of the total amount of GDRs actually approved by CSRC). Vice versa, in order to sell GDRs, an investor may either sell GDRs on SIX Swiss Exchange or another legitimate trading venue in the normal manner or instruct a designated broker to redeem the GDRs and sell the underlying A Shares on the Shenzhen Stock Exchange or the Shanghai Stock Exchange (where the A Shares are listed). This means that the China-Switzerland Stock Connect Program provides for a mechanism connecting the capital pools that exist at the participating stock exchanges in China and in Switzerland via a two-way depositary receipt program. The intention of this mechanism is to provide fungibility between the GDRs and the underlying A Shares by enabling investors or their brokers to place, buy and sell orders with designated brokers who are able to seek the

best price for the equity securities from either market. It should also be noted that pursuant to CSRC regulations, GDRs subscribed for by investors in an offering may not be redeemed within 120 days following the first day of trading. Therefore, during such a lock-up period GDR holders cannot redeem their GDRs and sell the underlying A Shares on the Shenzhen Stock Exchange or the Shanghai Stock Exchange and are thus, only able to sell their GDRs through SIX Swiss Exchange or another legitimate trading venue.

What are GDRs?

GDRs – the Swiss equivalent to American depositary receipts (ADRs) which are used by non-U.S. companies to access the U.S. capital markets – are tradable securities that are issued by a bank or a securities firm (depositary) to represent a certain number of the respective Chinese issuer’s underlying A Shares, which in turn are listed on the Shenzhen Stock Exchange or the Shanghai Stock Exchange. The GDRs allow the indirect exercise of membership and economic rights attached to the deposited A Shares. Through the listing of GDRs on SIX Swiss Exchange via the China-Switzerland Stock Connect Program, Swiss and international investors can (subject to Chinese law restrictions applicable to foreign investors) gain exposure to Chinese stocks.

Although the possibility of listing GDRs on SIX Swiss Exchange has existed for more than 15 years, no issuer had ever dared to make use of it, until very recently. A GDR listing on SIX Swiss Exchange carries both elements of a primary as well as of a secondary listing (as the issuer has already issued shares which are listed abroad) but is closer to a primary listing.

Secondary Listing of Shares vs. Listing of GDRs

Foreign listed non-Chinese companies have so far sought a secondary listing of their shares on SIX Swiss Exchange rather than a listing of GDRs. The main reason for choosing that route is that under certain conditions significant exemptions for secondary listings of shares apply with respect to the SIX listing requirements as well as the obligation to publish a prospectus. Chinese listed companies are, however, bound by strict domestic regulations for secondary listings of shares abroad, making a follow-on on the GDR segment of SIX Swiss Exchange a less arduous route which has become more attractive with the introduction of the China-Switzerland Stock Connect Program.

SIX Listing Requirements

(a) Requirements for the GDR Listed Issuer

The requirements that must be fulfilled by the issuer of the underlying shares whose shares are listed on a foreign stock exchange (“GDR Listed Issuer”) are the same as for a primary listing of shares in the main market of SIX Swiss Exchange, in particular:

Track record: The GDR Listed Issuer must have a company track record of at least three
Recognized accounting standard: The GDR Listed Issuer must have applied one of the following recognized accounting standards for the last three years: IFRS, US GAAP or, in the case of foreign issuers, EU-IFRS, UK-IFRS or Accounting Standards for Business Enterprises (ASBE) – the accounting standard Chinese listed issuers typically use.

Auditors and audit report: The GDR Listed Issuer must comply with the general SIX listing requirements regarding the licensing of its auditors and compliance of its audit reports.
Minimum equity: The reported equity capital of the GDR Listed Issuer on the first day of trading must amount to at least CHF 25 million in accordance with the applicable accounting standard (though the trading currency can be, and usually is, USD).

(b) Requirements for the GDRs:

For the GDRs the same requirements apply as for the listing of shares in the main market, in particular:

Valid issuance: At the time of listing, the GDRs and the underlying shares must have been validly issued. To have evidence that the underlying A Shares are validly issued, SIX Exchange Regulation AG (“SIX Exchange Regulation”) typically requires a legal opinion from a Chinese counsel which contains a statement to that effect.
Listing by class: The listing must comprise all of the issued GDRs in the same
Free float: The free float requirement only applies to the individual category of the GDRs to be listed. Hence, not the underlying shares but the GDRs must have an adequate free float at the time of listing. The free float is regarded as adequate if at least 20% of all of the GDR Listed Issuer’s outstanding GDRs in the same category are in public ownership. In addition, the GDR Listed Issuer must prove that the capitalization of the free float amounts to at least CHF 25 million on the first day of trading. In practice, this listing requirement is fulfilled by a pertinent confirmation of the lead manager.
Tradeability: The GDRs must be properly tradeable on SIX Swiss Exchange, and the GDR Listed Issuer has to establish rules on the legal ownership for the GDRs.
Denominations: The denominations forming the total value of a GDR must enable an exchange transaction in the amount of one round lot.
Clearing and settlement: The GDR Listed Issuer must ensure that transactions can be cleared and settled via the settlement systems that are permitted by SIX Swiss Exchange.
Paying agents: As the corporate actions and payments are channelled through the depository, the depository and not the GDR Listed Issuer must ensure that services pertaining to dividends, as well as all other corporate actions, are provided through the applicable settlement Although the SIX Listing Rules require that such services are provided in Switzerland, with respect to the GDR listings so far on SIX Swiss Exchange the depositaries have been international banks who use the European International Central Security Depositories Euroclear Bank SA/NV (as operator of the Euroclear System) and Clearstream Banking S.A. to make the respective book-entry settlement systems available for clearing and settlement of the GDRs. As it would be impracticable to use a paying agent in Switzerland under such set-ups, SIX Exchange Regulation has been willing to grant exemptions relating to this listing requirement.

The depository must either be (i) licensed as a bank under the Swiss Banking Act or as a securities firm under the Swiss Financial Institutions Act or (ii) subject to equivalent foreign supervision.

In order to ensure that the GDR holders can exercise the membership and economic rights attached to the underlying shares, the GDR Listed Issuer has to enter into a deposit agreement with the depositary who issues the GDRs.

In addition to this, the underlying shares must be held by the depositary in a way that they can be separated and segregated for the benefit of the investors in the event of debt restructuring or insolvency of the depositary. Further, the deposit agreement must oblige the depositary to provide the Regulatory Board and/or SIX Exchange Regulation, upon request, with all information and documentation in connection with the implementation of the deposit agreement, in particular with respect to the number of underlying shares deposited and GDRs issued.

(d) Prospectus Requirement:

A GDR Listed Issuer who applies for a listing on SIX Swiss Exchange must submit evidence that it has a prospectus that has been approved by a reviewing body (e.g. SIX Exchange Regulation) or that is deemed to be approved in accordance with the Swiss Financial Services Act (“FinSA”). An exemption from this obligation can apply when GDRs are listed that are the same category as has already been admitted to trading on SIX Swiss Exchange. When GDRs are, however, listed for the first time on SIX Swiss Exchange, as a rule, there is no exemption.

In addition to the minimum required content of a listing prospectus relating to a listing of shares, it is required that a GDR listing prospectus contains appropriate information about the depositary, the GDRs and the deposit agreement, in particular information about the rights of the GDR holders under the deposit agreement, insolvency protection (i.e. protection of the GDR holders in the event of debt restructuring or insolvency of the depositary) and the risks related to the GDR set-up. The disclosure of this information is required even in cases where the GDR listing does not trigger the obligation to publish a prospectus.

Trading Hours

A separate trading segment has been created for the GDRs listed on SIX Swiss Exchange. It is based on the model for the Mid-/Small-Cap Shares trading segment, i.e. the segment that includes shares which are listed in the regulatory standard for Special Purpose Acquisition Companies (SPACs). However, shorter trading hours apply as the opening auction only starts at 3:00 p.m. Swiss time, with continuous trading ending on 5:20 p.m. Swiss time and the closing auction and Trading-at-Last (TAL) until 5:40 p.m. Swiss time. Regular trading hours for the other equity securities (except in the Sparks trading segment) are quite different, with trading open between 9 am Swiss time and 5.40 p.m. Swiss time on each trading day.

These shortened (and late) trading hours should allow Chinese GDR issuers to publish price-relevant ad hoc information outside trading hours in Switzerland (where the GDRs are listed) and in China (where the underlying A Shares are listed). In addition, the shortened trading hours serve to pool secondary market liquidity to enhance price building and trade execution.

Conditions for Maintaining Listing

As soon as and for as long as the GDRs are listed on SIX Swiss Exchange, GDR Listed Issuers have to fulfil certain conditions to maintain the listing of GDRs under the SIX Listing Rules. These post-listing requirements include, inter alia, the following:

- Management transactions: GDR Listed Issuers have to ensure that the members of their board of directors and the executive committee report transactions in both the GDRs and the underlying shares.
- Corporate governance: GDR Listed Issuers are (only) required to declare in both the prospectus in accordance with the FinSA and the annual reports that they adhere to the corporate governance standards of their home markets.
- Interim reporting: GDR Listed Issuers are subject to the same interim reporting obligations as the issuers whose equity securities are listed on the SIX main market.
- Ad hoc publicity: GDR Listed Issuers are obliged to disclose price-sensitive facts, e. are subject to the ad hoc publicity obligations. This ad hoc publicity obligation applies to both the GDRs and the underlying shares. With respect to the underlying shares this means, in particular, that if price-sensitive facts in the home market of the underlying shares are being made public, the GDR Listed Issuers must simultaneously disclose such ad hoc information in Switzerland.
- Changes to depository and depository agreement: Changes concerning the depositary or the depositary agreement must be reported to SIX Exchange Regulation at the same time as the holders of the GDRs themselves are informed.

Further, Swiss capital market conduct rules (such as the prohibition of insider trading and market manipulation) apply as soon as the GDRs are listed on SIX Swiss Exchange. Since the prevailing view is that a listing of GDRs does not qualify as a “main listing” within the meaning of the Swiss Financial Market Infrastructure Act (“FinMIA”), the disclosure obligations regarding principal shareholders and the rules regarding public takeover offers set out in the FinMIA are not applicable.

GDR Listings of Listed Chinese Companies in Switzerland, United Kingdom and Germany

On the stock exchanges of Switzerland, United Kingdom and Germany which are covered by the China- Stock Connect Program, the following are the GDR listings by 19 April 2023:

(a) SIX Swiss Exchange

Issuer	Proceeds raised in the Offering (USD)	Listing Date	Industry of the Issuer
GEM Co., Ltd.	Approx. 381 million	28.07.2022	Energy – Urban Mining, New Energy Materials, Lithium Batteries
Gotion High-tech Co., Ltd.	Approx. 685 million	28.07.2022	Energy – Lithium Batteries
Keda Industrial Group Co., Ltd.	Approx. 173 million	28.07.2022	Energy – Clean Technologies
Ningbo Shanshan Co., Ltd.	Approx. 319 million	28.07.2022	Energy – Lithium batteries
Lepu Medical Technology (Beijing) Co., Ltd.	Approx. 224 million	21.09.2022	Life Sciences – Medical Devices
Joincare Pharmaceutical Group Industry Co., Ltd.	Approx. 92 million	26.09.2022	Life Sciences – Chemical Pharmaceuticals
Sunwoda Electronic Co., Ltd.	Approx. 440 million	14.11.2022	Energy – Lithium Batteries
Hangzhou GreatStar Industrial Co., Ltd.	Approx. 155 million	15.11.2022	Industrial – Machinery and Equipment
Jiangsu Eastern Shenghong Co., Ltd.	Approx. 718 million	28.12.2022	Chemicals – Textile Fibers
Zhejiang HangKe Technology Incorporated Company	Approx. 173 million	22.02.2023	Energy – Lithium Batteries
Fangda Carbon New Material Co., Ltd.	Approx. 190 million	15.03.2023	Industrial – Carbon and Graphite Materials
Zhejiang Supcon Technology Co., Ltd.	Approx. 564 million	17.04.2023	Industrial – Automation Control Products
Yangzhou Yangjie Electronic Technology Co., Ltd.	Approx. 215 million	18.04.2023	Manufacture – Semicconductor devices, chips and silicon wafers

Hence, the 13 listed Chinese issuers raised proceeds from the offerings of approximately USD 4.329 billion.

(b) London Stock Exchange

Issuer	Proceeds raised in the Offering (USD)	Listing Date	Industry of the Issuer
Huatai Securities Co., Ltd.	Approx. 1.540 billion	17.06.2019	Financial Services – Securities
China Pacific Insurance (Group) Co., Ltd.	Approx. two billion	17.06.2020	Financial Services – Insurance
China Yangtze Power Co., Ltd.	Approx. 1.830 billion	30.09.2020	Energy – Electric Power, Hydropower
SDIC Power Holdings Co., Ltd.	Approx. 226 million	19.10.2020	Energy – Power Generation
Ming Yang Smart Energy Group Ltd.	Approx. 657 million	08.07.2022	Energy – Renewable Energy Equipment

According to media reports Zhejiang Yongtai Technology Co., Ltd., a company listed on the Shenzhen Stock Exchange and active in the Chemicals industry, is currently preparing a listing of GDRs on the London Stock Exchange.

As of end of March 2023 no Chinese companies had listed GDRs in Germany. However, according to public media SANY Heavy Industry Co., Ltd, China’s biggest maker of engineering machinery, announced that it is preparing a listing of GDRs for a listing on the Frankfurt Stock Exchange. Thus, it would be the first China-listed company to list GDRs in Germany.

Industries of the GDR Listed Chinese Issuers

The Chinese issuers listed on SIX Swiss Exchange are active in diversified industries, including, inter alia, renewable energy, high-end technology equipment and life sciences. It is worth mentioning that five GDR Listed Chinese Issuers are active in the lithium battery industry and more than a dozen Chinese companies which are active in this industry announced to list GDRs on SIX Swiss Exchange. For comparison, three of the Chinese companies that listed GDRs on the London Stock Exchange are also active in the energy sector and two in the financial sector.

Parties involved in a GDR Offering and Listing

In addition to the Chinese listed issuers, many other players worldwide are typically involved in a GDR offering and listing on SIX Swiss Exchange. Amongst others, the following parties are typically involved in such transactions:

So far, the CSRC has been responsible for the regulatory Chinese transaction approvals. In Switzerland, the listing application has to be approved by SIX Swiss Exchange.

Further, there are bookrunners and global coordinators involved. Among others, Huatai Financial Holdings (Hong Kong) Limited and CLSA Limited often acted as global coordinators and bookrunners. Also, Swiss banks are stepping into this new business (e.g. UBS AG has been acting as global coordinator and bookrunner in two Swiss GDR transactions). Typically, the global coordinators act on behalf of the managers and are directly involved in the pricing. In addition to this, in some Swiss GDR transactions cornerstone investors participated in the offering.

Under the set-ups chosen so far, SIX listed GDRs are deposited with depositaries who use European International Central Security Depositories (ICSDs) Euroclear and

Clearstream to facilitate the clearance and settlement of transactions with GDRs. In 12 Swiss GDR transactions Citibank, N.A. acted as depository and Deutsche Bank Trust Company Americas was chosen as depositary in one Swiss GDR transaction. Both of these depositaries are based in the United States of America which underpins once more the truly international transaction structure.

Structure of the Offering of GDRs in Switzerland

In the Swiss GDR transactions known so far, the offerings of the GDRs consisted of private placements in Switzerland solely to professional clients within the meaning of the FinSA and private placements in certain jurisdictions outside Switzerland and the United States of America. Some offerings provided for an over-allotment option (according to which the GDR Listed Issuer grants to the managers an option, exercisable by the global coordinator and the stabilization agent within a certain time period after the first day of trading to purchase the over-allotment GDRs) and/or for an upsize option (which consists of the option that may be jointly exercised by the GDR Listed Issuer and the global coordinator on the date of pricing of the offering based on demand to offer a certain additional number of GDRs, i.e., the number of offered GDRs may be increased to a certain pre-determined number if the market reception is good).

Creation and Redemption of GDRs

The process relating to the creation and redemption of GDRs under the China-Switzerland Stock Connect Program is not under the control of the Chinese GDR Listed Issuer. Whilst the number of GDRs listed at any time on SIX Swiss Exchange may increase or decrease at the option of the GDR holders and the A shareholders respectively, the total share capital of the Chinese GDR Listed Issuer remains unchanged. The regulations of SIX Exchange Regulation are not adapted to cover such cross-border creation and redemption of GDRs. SIX Exchange Regulation has, however, developed a practice according to which it accepts a yearly report stating the number of issued (listed) GDRs, the number of issued (listed) GDRs since last report, the number of newly issued (listed) GDRs (increase), the number of GDRs redeemed (reduction) since last report, the number of remaining (unlisted) GDRs and the number of remaining (unlisted) GDRs since last report.

Announced GDR Listings on SIX Swiss Exchange

As of mid-march 2023, it is being reported in the media that, apart from the companies that have already successfully listed their GDRs on SIX Swiss Exchange, approx. 30 Chinese listed companies have disclosed plans to issue GDRs in Europe and more than 90% of these companies have plans to list GDRs on SIX Swiss Exchange.

On 20 March 2023, CSRC approved the issuance of GDRs of Kunshan Dongwei Technology. Further, media reports stated that Contemporary Amperex Technology Co. Ltd., a global leader of new energy innovation technologies, plans a listing of GDRs on SIX Swiss Exchange and a record amount of at least USD 5 billion could be raised thereby.

It appears that Chinese regulators are currently reconsidering whether any changes in the GDR listing approval process in China shall be implemented. Therefore, the GDR approval process in China is currently on hold.

Potential GDR Listings on Chinese Stock Exchanges

The China-Switzerland Stock Connect Program is designed as a two-way depositary program. Therefore, it is conceivable that SIX listed Swiss issuers might consider pursuing a GDR listing on the Shenzhen Stock Exchange or the Shanghai Stock Exchange, they are entirely free to do so. To date, no SIX listed issuer has made use of this opportunity and it can be expected that this will remain the less likely transaction direction at least in the short term given that the SIX marketplace is already truly international.

Outlook

The China-Switzerland Stock Connect Program provides a new channel for Chinese companies which are listed on the Shenzhen Stock Exchange or the Shanghai Stock Exchange to raise capital in Switzerland and it seems that GDR listings on SIX Swiss Exchange could become a regular financing tool for Chinese listed companies. Many other Chinese listed companies have publicly expressed real interest in, and some are already actively pursuing, a listing of GDRs on SIX Swiss Exchange. There are several factors which make SIX Swiss Exchange attractive for Chinese companies. SIX Swiss Exchange holds a top spot in the heart of Europe and is one of Europe’s biggest exchanges in terms of market capitalization of its listed companies. It enables efficient capital raising and a broad exposure to Swiss and international investors, thereby achieving a high level of brand awareness and visibility beyond China. Although issuers listed on SIX Swiss Exchange are not required to have a physical presence in Europe, quite a few Chinese issuers that have listed GDRs on SIX Swiss Exchange have established or are considering to establish their presence in Europe (including Switzerland), or introduced or plan to introduce their products or services into the European markets.