Regulator details requirements and qualifications for issuing companies

China's securities regulator has issued draft rules on the issuance and trading of Chinese Depository Receipts, paving the way for the eventual launch of the program that will allow overseas-listed innovative Chinese companies to float shares on the domestic stock market.

The rules, released on Friday by the China Securities Regulatory Commission, set out detailed requirements and qualifications for companies to issue CDRs, an arrangement that will enable overseas-listed companies to transfer part of their holdings to a custodian bank and sell them on a mainland exchange board.

The CDR system will also be adopted under the proposed trading link between the Shanghai and London stock exchanges, which is scheduled to be launched this year, according to the regulator.

To be qualified as CDR issuers, companies must have a well-functioning corporate structure and sound financial conditions and the capacity to remain continuously profitable, according to the rules. There must have been no financial fraud or a major change of the actual controllers of the company in the past three years, and the controlling shareholders must have no record of major rule violations or activities harming investors' interests.

Commercial banks, securities firms and securities depository and clearing firms can be CDR custodians, according to the rules, which are subject to public comment until June 3.

Chinese regulators have accelerated the introduction of the pilot program to allow overseas-listed companies to return to the domestic market. Media reports, citing people close to the CSRC, said that the first CDR issuer will likely be approved by the regulator within a month.

The issuance and trading of CDRs will help boost the revenue of the nation's securities firms, investment bank China International Capital Corp said in a research note.

The regulators announced the CDR program on March 30 to support the domestic listing of innovative companies. The program will cover companies from strategic emerging industries including information technology, artificial intelligence, high-end equipment manufacturing and biotechnology.

The CDR program will apply to overseas-listed Chinese companies with market capitalization of no less than 200 billion yuan ($31.4 billion). For unlisted companies, they must have a revenue income of at least 3 billion yuan for the past year and valuations of no less than 20 billion yuan, according to the regulator.

Analysts expected that some Hong Kong or US-listed tech giants will likely be selected for the CDR program.

"It is noteworthy that the pilot domestic listing program applies to both unlisted companies incorporated in the Chinese mainland and unlisted red-chip enterprises－companies operating in China, but registered overseas. It is the first time that red-chip enterprises have been allowed to go public on a domestic exchange in the Chinese mainland," said Gao Ting, head of China Strategy at UBS Securities.

Gao said that CDRs could be enforced in two possible ways, either by an offering or a listing facility. The former way would allow overseas-listed companies to refinance by issuing new shares to onshore investors while the latter issues no additional shares and acts as an onshore trading derivative, backed by overseas-listed shares.