In Depth: ChiNext Tests Expanding Registration-Based IPOs to Overall Market
China’s Nasdaq-style sci-tech innovation board, the STAR Market, welcomed its 100th listed company April 29 after nine months of operation.
Meanwhile, its decade-old rival, the Shenzhen Stock Exchange’s ChiNext board, is officially launching a trial of a similar registration-based system for initial public offerings (IPOs), making for even more direct competition but also raising the question of overhauling the broader A-share market.
On April 27, the Central Committee for Deepening Overall Reform, overseen by President Xi Jinping, cleared a plan to initiate the registration-based IPO system on ChiNext. The China Securities Regulatory Commission (CSRC) and the Shenzhen Stock Exchange issued supporting rules and started soliciting public opinions.
China’s A-share stock market responded with a mixed performance in volatile trading, to some extent reflecting the market’s concerns about the expansion of the registration-based IPO system to the existing A-share market.
A registration-based IPO mechanism is more market-oriented than the approval-based system, under which the CSRC vets every application and approvals can take months or even years. Currently registration-based IPOs are allowed only on the STAR market. The CSRC previously said it would restructure the major stock exchanges in the image of the STAR Market.
Revisions for existing market
Unlike the STAR Market, which was newly created and where the rules apply to all listed companies, the changes at ChiNext will also involve secondary offerings and acquisition and merger deals involving the more than 800 listed companies. Some of the existing companies are not in compliance with the new listing rules. In addition, different requirements apply to investors eligible to buy share in existing companies and in new IPOs.
Rolling out new ground rules for a newly created board is relatively easier that making changes for an existing board. The ChiNext revisions will be a key test on the path to expanding the registration system to the overall A-share market, a person close to regulators said.
ChiNext’s registration-based IPO system will largely be same as the STAR Market system, CSRC Vice Chairman Li Chao said at a media briefing April 27. But it is hoped that the two boards can develop with different focuses and complement each other in moderate competition, he said. In implementing the registration-based IPO system, a mechanism to coordinate the review processes by the two boards should be established to ensure largely consistent review standards and approval speeds, he said.
“The review standards can’t be higher on one board and lower on the other, and the approval speeds can’t be faster on one and slower on the other, creating problems of fighting for listing resources,” Li said.
Shenzhen vs. Shanghai
Currently the listing requirements for the two boards are similar with slight differences. ChiNext’s new rules would remove a requirement that potential listing candidates have no losses in the latest period and allow a one-year transitional period for companies operating at a deficit.
For money-losing businesses, ChiNext requires an expected market value of no less than 5 billion yuan ($708 million) and revenue of no less than 300 million yuan in the most recent year. The STAR market requires the same minimum revenue but a lower expected market value of at least 3 billion yuan.
Meanwhile, ChiNext would raise the bar for profit-making companies, requiring earnings of no less than 50 million yuan in the last two years or expected market value of no less than 1 billion yuan, on a par with the STAR Market.
For those companies registered as wholly foreign-owned enterprises in China, the standards are even higher. Many larger Chinese enterprises are often incorporated abroad in places such as the Cayman Islands and operate in China through local subsidiaries to bypass China’s securities requirements and gain access to foreign capital markets.
ChiNext supports listings of such companies with special equity structures, but their market value must be at least 10 billion yuan or their profits must be at least 500 million yuan in the most recent year. The STAR market has no profitability requirements for such companies.
ChiNext has slightly stricter listing requirements than its Shanghai rival, but it also accommodates a wider range of companies, a senior investment banker in Beijing told Caixin. The Shenzhen board targets high-growth startups with no restriction on sectors, while the Shanghai board focuses more on companies in technology and science industries.
But an investment banker in Shanghai said the two boards are not designed to be clearly differentiated from each other. Even though the regulators have good intentions to develop them with different focuses, in reality a fight for listing candidates is unavoidable, the banker said.
Market participants welcome the rivalry.
“Competition is a good thing,” said Wang Jiyue, an independent analyst and an investment banking veteran, “Exchanges should embrace competition instead of fearing it.” The key to competition is to attract high-quality issuers, but fighting for low-quality listings can only damage an exchange’s foundation, he said.
Relaxed equity-refinancing and streamlined delisting
In addition to IPOs, the registration-based vetting system will also apply to secondary offerings of companies already listed on ChiNext. For offerings no more than 300 million yuan and no more than 20% of the company’s net assets at the end of the latest year, the Shenzhen Stock Exchange promises to submit the registration to the CSRC within three business days.
With the new rules making it much easier for companies to raise money, some worry that it may encourage certain listed shell companies ― those with no significant business activity ― to take advantage of the relaxed equity-refinancing process.
To prevent abuse of the streamlined process, the exchange requires listed companies with secondary offering plans to demonstrate the innovativeness of their fundraising projects and fully disclose their business model, governance, growth strategy and financial information. Violators are prohibited from issuing shares for three to five years.
Along with the implementation of the registration-based IPO system, the Shenzhen Stock Exchange also pledged to improve the delisting mechanism for ChiNext. As part of a streamlined delisting process, the exchange would drop a suspension period and a transitional resumption period before a stock can be delisted, meaning any company with losses for three consecutive years would be delisted directly without any wiggle room.
In addition to financial indicators, the exchange also would add new delisting criteria, including market cap of less than 500 million yuan for 20 consecutive trading days and major defects in information disclosure.
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