China expands financing channels for start-ups
Recent moves include designation of companies as ‘innovation level’ and ‘basic level’ in effort to smooth development of a multi-layer capital market
China decided to give full play to market forces when it officially divided the over-the-counter National Equities Exchange and Quotations (NEEQ), also known as the “new third board”, into two levels, analysts said.
The China Securities Regulatory Commission’s (CSRC) decision to allow companies with a robust financial performance, or bigger market capitalisation, to list on the higher “innovation level” and others at the “basic level”, is an indication that the regulator has not given up on its hopes for a multi-layer capital market in China.
By categorising the companies, the CSRC expects a direct transfer of qualified startups to the Shanghai or Shenzhen stock exchanges at an opportune time, they said.
Most of the large-sized and profitable companies, which fall under the “innovative firms” category, would also be subject to stringent information disclosure requirements that will come into place on June 27.
“Innovative firms” are companies that could be elevated to the stock exchanges after a certain period of strict regulatory oversight, the analysts sources said.
“The CSRC is looking to nurture the growth of quality firms on the market,” said He Xiaobin, research head of the New Third Board Club, an investment consultancy. “It is possible that it would come out with more relevant policies soon.”
The regulator, however, did not mention when the so-called “innovative firms” would be eligible for an elevation to the main board or the Nasdaq-like ChiNext market in the future, but brokers and analysts predicted that the first firm would likely be transferred from the new third board to the stock exchanges within 12 months. Companies with capitalisation of more than 600 million yuan (HK$709 million) fall into the category of innovative firms.
The CSRC, led by chairman Liu Shiyu who took office in February, has shelved a batch of plans to liberalise the stock market, including the creation of a new board slated for emerging industries and implementation of a registration-based initial public offering (IPO) system. But it has also faced flak for its capricious policymaking during the roller-coast rides on the bourses.
That said, the decision to develop the new third board was one of the few liberalisations that was enforced in line with its agenda.
Since the establishment of the mainland’s stock market in 1990, a majority of the companies, particularly medium- and small-sized businesses, have been shut out of the stock exchanges with regulators giving priority to state-owned firms hungry for capital. About 800 companies are said to be waiting for initial public offering approvals.
The Third Board offers small firms an alternative channel to raise funds more easily, as capital infusion and equity transfers are conducted via market makers or through private deals.
As of last month, about 7,400 firms were traded on the new third board despite lacklustre liquidity, compared to about 3,000 companies listed on the Shanghai and Shenzhen stock exchanges.
“The regulator appears to be fully aware of the small companies’ thirst for fresh funds,” said Wang Feng, chairman of Ye Lang Capital. “The new third board will play an important role in supporting startups.”
He said that the “innovative board” on the Third Board would be equivalent to the Over-The-Counter Bulletin Board (OTCBB) market in the United States.
The categorisation is expected to come in handy for technology startups who are desperate for funds to accelerate technology transfer and commercialisation of products. The Third Board, with its direct financing channels, would be a handy direct financing option for these firms, especially after
the inordinate delay in IPO reforms and scrapping of the emerging industries board.
The CSRC said the move to categorise the firms traded on the Third Board also reflect its efforts to better allocate regulatory resources, with a focus on the mature businesses which could be promoted to the stock exchanges.
Beijing has pledged to widen small firms’ access to the stock market to reinforce the mainland economy’s transformation into a new growth pattern driven by consumption and entrepreneurship.
But a stock market rout in mid-2015 deterred the securities regulator from implementing planned liberalisation such as introduction of an easier IPO approval procedure.
On the new third board, it normally takes several months before an applicant gets a listing approval from the Securities Association of China. In stark contrast, the 800 IPO applicants seeking a listing status on the stock exchanges may spend a few years before securing a go-ahead from the CSRC.