Third Draft of the Amendment to Securities Law: Delisting Made Easier?

The problem of a lengthy procedure, low efficiency and high difficulty of delisting is very prominent in the A-share market.  The main reason is the listing suspension system that exists on the main board of the Shanghai Stock Exchange and three boards of the Shenzhen Stock Exchange.  Article 55 of the current Securities Law provides that the relevant stock exchange should suspend the listing of the relevant stock in any of the following circumstances:

1 . the market capitalization or share ownership structure, etc. of the company changes, thus causing the company to no longer fulfill the listing requirements;

2 . the company fails to disclose its financial status as required, or there is false disclosure in its financial and accounting reports, which may mislead investors;

3 . the company commits material non-compliance;

4 . the company has been operating at a loss for the last three consecutive years; or

5 . any other circumstances prescribed in the listing rules of the stock exchange.

Therefore, the current listing suspension system, combined with local protectionism and other non-market factors, in fact provides listed companies with a buffer period.  Some listed companies can even adjust their profits through various means to avoid being delisted, by engaging in creative financial accounting of "two years of losses, one year of small profits", which results in the situation of being suspended but not delisted and triggers so-called "shell resource" speculation.

Trend

An initial public offering represents the entrance to the capital market, and the delisting system represents the means of exit.  A strict delisting system is an important means to ensure the quality of listed companies and is necessary to supplement the registration system.  The abolition of the listing suspension system in the Third Draft is not an isolated attempt.  The Shanghai and Shenzhen Stock Exchanges have issued improvement schemes for delisting five times since 2012.  The China Securities Regulatory Commission also revised and improved the delisting system in 2014 and 2018, while listing suspension and recovery have been abolished in the delisting system of STIB.  These measures represent the legal evolutionary track of gradually improving the delisting system as it moves towards maturity. It is foreseeable that the continued improvement of the delisting system in future will create an "orderly entry and exit, survival of the fittest" market ecology, and to encourage the market to take a decisive role in optimizing the allocation of resources so that the stock price reflects the true value, and to protect investors.

In conclusion, a slight move in one part may affect the situation as a whole. The reform of the delisting system is a systematic project. The delisting system has a close relationship with basic capital market systems such as registration reform, bankruptcy liquidation and securities litigation.  Exactly how reform is to be introduced to the delisting system remains to be seen, and the exact nature of the synergies among different systems is not yet clear.