Exchanges Take Aim at Firms Facing Delisting in Bid to Rein In ‘Backdoor Listings’

(Beijing) — China’s stock exchanges are targeting companies facing delisting that are trying to restructure their assets solely to become shell companies and profit from “backdoor listings.”

In December, the Shanghai and Shenzhen stock exchanges sent letters to 11 companies on the verge of delisting, questioning the role of related companies in their transactions, sources of funding and sales of assets below market prices.

Of the 11 companies in question, six are state-owned enterprises, including Hualing Xingma Automobile (Group) Co. Ltd., Nanning Chemical Industry Co. Ltd., and Group Kunming Machine Tool Co. Ltd.

Having met criteria set by the stock exchanges, including two consecutive years of losses, annual revenue of less than 10 million yuan ($1.44 million) and negative net assets over the past year, companies will be designated as being at risk of delisting. Four years of losses will result in a firm being delisted.

Delisting can mean the loss of potential shell-company status, a highly sought-after resource in China’s stock markets, where it can take years for private companies to achieve an initial public offering (IPO).

In a backdoor listing, a private company will inject its own assets into a publicly listed shell firm and take control of it. The private company then becomes a public one without the regulatory hurdles of having an IPO. According to data from the China Securities Regulatory Commission (CSRC), 636 companies were waiting for regulatory approval to go public as of Dec. 22.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)