Subordinate enterprises of domestic listed companies being listed overseas is a kind of partition listing that is familiar in the international capital market. Generally the parent company separates parts of its assets, operations or some subsidiary companies and then raises capital by floating shares to go public separately. After the subsidiary company being listed, the parent company still maintain the relative or absolute holding position.

With China entering into WTO and the Chinese capital market getting integrated into the world market, there will be more and more domestic listed companies that part its operation overseas to go public. In order to get listed overseas smoothly and achieve more financing opportunities, some companies sometimes would part their core operations to be listed overseas, however, which will impair parent company's ability to continuously operate and ability to make a profit.

Therefore, partition listing, as a kind of innovated finance vehicle in China, needs the relevant innovated supervision measure to regulate it. China Securities Regulatory Commission issued Issues Relevant to Regulating the Overseas Listing of Subordinate Enterprises of Domestic Listed Companies Circular （ hereinafter referred to as “the Circular” ） lately. The Circular, using the supervision experience of international mature capital market for reference, puts forward supervision opinions proceeding from the respects of maintaining listed companies' independent listed status, the abilities to continuously operate and protecting the rights and interests of medium and small shareholders and etc. As for the partition listing, the Circular is the further regulation and it will be conducive to prevent the listed companies from drawing out the parent company and regulate the behaviors of the listed companies.

Firstly, the Circular makes it definite that the domestic listed company applying for partition listing overseas shall meet seven conditions:

• i. The Listed Company has been profitable in the most recent three years consecutively.

• ii. The businesses and assets in which the Listed Company has invested with the proceeds from its share issues and share offerings within the most recent three fiscal years shall not be used as its capital contribution to the Subordinate Enterprise for the purpose of applying for overseas listing.

• iii. The net profits of the Subordinate Enterprise that the Listed Company is entitled to according to the equity interests in the consolidated statements for the most recent fiscal year shall not exceed 50% of the net profits in the consolidated statements of the Listed Company.

• iv. The net assets of the Subordinate Enterprise that the Listed Company is entitled to according to the equity interests in the consolidated statements for the most recent fiscal year shall not exceed 30% of the net assets in the consolidated statements of the Listed Company.

• v. There is no competition in the same industry between the Listed Company and the Subordinate Enterprise, and they are independent from each other in assets and finance, and have no cross employment of managers.

• vi. The funds or assets of the Listed Company are not in the possession of the person, legal person or other organization having actual controlling power or its affiliated party, and there are no major affiliated transactions that prejudice the interests of the company.

• vii. The Listed Company has no acts of major violations of laws or regulations in the most recent three years.

Secondly, in the respect of protecting the interests of public stockholders, the Circular stipulated as follows: The shares of the Subordinate Enterprise held by the directors, senior management personnel and affiliated personnel of the Listed Company and the Subordinate Enterprise shall not exceed 10% of the total share capital of the Subordinate Enterprise prior to the overseas listing. Meanwhile, in the proceeding the Circular requested: If an arrangement is made for the directors and senior management personnel of the Listed Company to hold shares in the Subordinate Enterprise, the independent director shall solicit voting rights from the shareholders of floating shares (publicly held shares) in respect of such matter, and such matter shall be voted on independently and adopted by more than half of the voting rights of the shareholders of floating shares (publicly held shares) attending the shareholders' general meeting.

     Thirdly, the Circular pointed out: The Listed Company shall perform its obligations to disclose information on the following events on the day following their occurrence:

• i. The resolutions passed by the board of directors and the shareholders' general meeting on the overseas listing of the Subordinate Enterprise.

• ii. The acceptance of the application submitted to the China Securities Regulatory Commission by the Subordinate Enterprise for overseas listing.

• iii. The Subordinate Enterprise receives approval for overseas offering and listing.

• iv. The Listed Company shall disclose to the domestic investors in a timely manner any major event disclosed to overseas investors by the Subordinate Enterprise that may cause unusual fluctuation in the share price.

And the Listed Company shall explain the business development of the Subordinate Enterprise in the major matters of the annual report.

Fourthly, the Circular makes it definite: T he Listed Company shall appoint a securities business institution that has been registered with the China Securities Regulatory Commission and included in the list of sponsor institutions as its financial consultant (Financial Consultant) for maintenance of continuous listing status. The Financial Consultant shall, during the remaining time of the year in which the Subordinate Enterprise is listed overseas and the subsequent full fiscal year, continuously supervise and guide the Listed Company to maintain its independent listing status.

Finally and most importantly, the Circular especially concentrates on keeping away and controlling the market risks and stipulates some quite strict conditions on the conditions and information disclosure requirements for domestic listed companies to be listed overseas.

To sum up, the Circular has the following realistic meanings in further regulating the behaviours of the listed companies and renewing the confidence of the investors:

•  Be conducive to safeguard the rights and interests of the stockholders of the listed companies.

•  Encouraging the listed companies that meet the partition conditions to explore broader financing channels and gradually embody the investing value of the domestic listed companies.

---- Rebecca Hu