2012 Review: Capital Markets – market reforms, SME boards and shareholder fundraising
January 04, 2013 | BY
clpstaffThe China Securities and Regulatory Commission (CSRC) rolled out a series of reforms in 2012 that showed that its commitment to opening up the country's capital markets remains strong
Despite the country's stock markets falling in 2012, practitioners stayed optimistic about the domestic IPO market in 2013. In particular, they were excited about the long-awaited New Third Board, an over-the-counter trading system, serving high-growth small and medium-sized enterprises (SMEs).
“I am optimistic for 2013,” said Dai Guanchun of Jingtian & Gongcheng, although he admitted that the turnover of IPOs in 2012 was not great. “At the beginning of the year, there were too many IPOs approved and most of them were not generating profits for investors,” he said.
The enthusiasm for overseas IPOs also cooled down, with many Chinese companies delisted from the US market. Wayne Chen of Llinks Law Offices believes future issuers on the A-share market would have great potential in 2013.
“It is not merely because of the low valuation or regulatory uncertainties in overseas markets, but that the regulatory mechanism of domestic primary and secondary markets is more well-established than many outsiders think. Issuers have a greater understanding of domestic markets,” said Chen, who is based in Shanghai.
|Guidelines bring clarity
In May, the China Security Regulatory Commission issued the most important reform guidelines of the year. The Guiding Opinions on Further Intensifying Reform of New Shares Issuance Regime (Consultation Draft) (进一步深化新股发行体制改革的指导意见(征求意见稿) removed the three-year lock-up period and highlighted concerns for information disclosures and pricing control.
Practitioners described removing the three-year lock up period as a “breakthrough towards a more liberalised and liquid market”.
“It is possible professional investors will be more specialised in certain industries instead of across the board as was the case previously,” said Dai.
As part of an effort to control risk, issuers are required to further analyse any potential risks if their price earning ratio grows 25% higher than listed industry peers. Underwriters could also invite five to 10 individual investors to participate in pricing procedures.
Dai said that the market is likely to shift from a focus on raising capital for specified investment projects to accommodate investors who want to enable liquidity in their assets, or in other words, a multi-functional equity market.
|Cross-border investments
In July, the CSRC made a further attempt to accelerate cross-border flows. Under the Provisions on Issues Relevant to the Implementation of the〈Measures for the Administration of Securities Investments in China by Qualified Foreign Institutional Investors〉(关于实施〈合格境外机构投资者境内证券投资管理办法〉有关问题的规定), qualified foreign institutional investors (QFIIs) are allowed to choose more than one securities dealer. The 20% cap on the shares that foreign investors can hold in listed companies was also raised to 30%.
“This will encourage foreign investors as they can get more involved and take larger stakes in listed companies. At the same time, the local market would gain more liquidity from this increase,” said Hubert Tse of Boss & Young. In April, the CSRC also raised the quota for QFIIs from $30 billion to $80 billion.
Shortly after the CSRC proposed to raise the limit, Qatar lodged an application for a QFII license, seeking an investment quota of US$5 billion, five times the cap of $1bn, according to the BBC.
Foreign investors can also invest in the interbank bond market and private placement bonds issued by small and medium-sized enterprises. “Not every SME in China is able to secure bank loans or private equity investments, so private placement would provide them with another channel for much needed fundraising,” said Tse.
Dai expected further developments with the New Third Board. “Given the increased difficulty for Chinese SMEs with high-growth to board either A shares or offshore red-chip markets, the new third board will offer a unique market for both companies and investors,” he said.
|Regulating unlisted companies
Unlisted companies that wish to go public, but who have more than the limit of 200 shareholders, previously had to go through pre-IPO restructuring, which is a complicated and time-consuming process.
In October, the CSRC officially regulated these kinds of companies by issuing the Measures for the Regulation of Unlisted Public Companies (非上市公众公司监督管理办法), which took effect on January 1 2013.
“It could benefit companies that want to have a larger shareholder basis for fundraising purposes. It provides a legal basis for these companies who plan to go public on the A share market,” said Wayne Chen.
The rules provide a recognition mechanism. If the CSRC approves or recognises the status of these companies, they do not have to go through the restructuring process before going public.
It is also expected that PE funds will be subject to more control, including fund raising, investment and exit from listed companies. “It may not be as easy for PE funds to make money as in the past a few years,” said Dai.
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