Across The Border

Reform delays make mainland China’s ‘new third board’ a magnet for small companies seeking cash

Premier Li Keqiang wants more channels for small firms to raise funds

PUBLISHED : Wednesday, 13 April, 2016, 4:58pm
UPDATED : Wednesday, 13 April, 2016, 4:58pm

The “new third board”, the mainland’s biggest over-the-counter (OTC) equity market, has become a magnet for cash-hungry small companies now the securities regulator has shelved plans to create a new board for emerging industries and also delayed the implementation of a registration-based system for new share offerings.

The electronic equity transfer system has long been touted as an important part of mainland China’s multi-layer capital market, designed to help start-ups raise funds in line with Beijing’s determination to bolster technological development.

Its profile was raised recently after the China Securities Regulatory Commission (CSRC) unexpectedly abandoned plans to create a new board at the Shanghai Stock Exchange which would have been home to high-growth firms in the fields of information technology, new energy and biotechnology.

To a certain extent, it will become the only fundraising platform for those small firms that seek growth capital in the next few years
He Yong, New Third Board Club

The securities regulator has also put on hold a plan to ease the review process for initial public offerings (IPOs), making it difficult for hundreds of listing applicants to tap stock market funds any time soon.

Beijing approved the launch of the board for emerging industries late last year, with market watchers predicting the first batch of companies would receive the go-ahead to list in the first half of this year.

The CSRC made an about-turn in March when it deleted the plan for the new board from the government’s five-year blueprint for 2016-2020 after Liu Shiyu, a former deputy governor of the central bank and chairman of Agricultural Bank of China, replaced Xiao Gang as commission chairman.

At the end of 2015, the nation’s top legislature cleared the way for the CSRC to embark on a new IPO system by allowing it to relinquish responsibility for reviewing listing documents.

The so-called registration-based IPO mechanism would technically open the floodgates for hundreds of companies to float new shares on the two stock exchanges.

It had been highly expected that an revised IPO approval system would debut in the first half of 2016 after it received an endorsement from the top lawmakers.

But the CSRC said recently that it would be very cautious on taking a step forward in implementing the registration-based IPO system, battered by worries that a fresh equity influx could dilute existing holdings amid a weak market.

CSRC ready to pull the trigger for IPOs

The statement was a clear message that the IPO reform wouldn’t be accelerated for least six months, according to investment bankers and analysts.

Under the new system, applicants would be required to fully disclose information about earnings and operations after filing listing applications, with the stock exchanges reviewing the accuracy of the documents.

They could start selling new shares without going through a CSRC approval procedure because the regulator would give market forces full play in deciding the worth of the companies.

“The new third board is obviously the focus of the securities reform,” said He Yong, vice-president of New Third Board Club, an investment consultancy. “To a certain extent, it will become the only fundraising platform for those small firms that seek growth capital in the next few years.”

There are more than 6,400 companies able to be traded on the OTC market, with more than 80 per cent of them profitable last year, according to Shanghai Securities News.

The CSRC is expected to publish a new rule next month to promote the development of the third board, under which companies would be categorised based on their scale and maturity.

Those that meet the requirements for being “innovative firms” would probably be eligible for elevation to the Shanghai or Shenzhen stock exchanges as an A-share listed company.

It has been speculated that companies with capitalisation of more than 600 million yuan (HK$720 million) and with annual sales of at least 40 million yuan in the previous two years would be qualified for the higher level of the new third board, which is formally called National Equities Exchange and Quotations.

China’s loss is Hong Kong’s gain, as CSRC drags its heels on IPO reform

About 260 firms traded on the OTC market would be defined as innovative firms based on the criteria.

“A transfer from the new third board to the stock exchanges is definitely desirable for all of the small firms given the suspensions of other liberalisations,” said Ray Lu, a director with Hotung Ventures. “But they still need to work hard to improve their fundamentals.”

Premier Li Keqiang hopes to create more channels for small firms to directly raise funds rather than borrowing money from banks.

He has strongly advocated the creating of a board for emerging industries and reform of the mainland’s strict IPO approval system to let more companies secure funds via equity financing.

The efforts are in line with the leadership’s decision to transform the growth pattern for the mainland economy to one driven by consumption and entrepreneurship, instead of exports and investment.

However, the reform measures ran into a hurdle following the boom-to-bust cycle last summer and a sharp fall in the stock market in the first week of this year when a poorly implemented circuit breaker twice led to the halting of trading for the day.

In order to better develop the New Third Board, analysts suggested the regulator lower the threshold for investors keen on participating in the trading of the New Third Board to enhance liquidity.

Presently, an individual investor is barred from trading on the New Third Board unless he has capital base of at least 5 million yuan.