Across The Border

Small Chinese firms rush to take advantage of direct transfer to main board listings

PUBLISHED : Friday, 10 March, 2017, 4:38pm
UPDATED : Friday, 10 March, 2017, 10:11pm

Start-up companies trading on China’s “third board” are clamouring to take advantage of a new “direct transfer” system designed to help them get their shares listed on the two main stock exchanges.

More than 320 firms listed on the National Equities Exchange and Quotations (NEEQ) board have applied for initial public offerings in Shanghai and Shenzhen, according to Lianxun Securities’ research institute.

But analysts believe the companies and prospective investors are getting overexcited as many are likely to have their applications rejected.

“A direct transfer system doesn’t necessarily mean all the applicants will get through the review procedure,” said Cang Zongfeng, the chief researcher at the New Third Board Club, an investment consultancy. “The regulator is expected to tighten the review procedure, with a large number of applicants rejected for a direct transfer.”

The rush of enthusiasm for floating on the two bourses follows recent moves to liberalise capital markets that included allowing the direct transfer of firms from the Beijing-based NEEQ to the trading floors of Shanghai and Shenzhen.

In early February, Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC), likened the over-the-counter market to a nursery garden, performing the crucial role of underpinning capital markets by nurturing the growth of future profit stars.

The Shenzhen stock exchange then published a statement, approving firms of sufficient quality listed on the NEEQ to be directly promoted to its trading floor.

On the main stock exchanges, where liquidity is much stronger than in the OTC market, it is generally easier for companies to increase their market value and to raise capital to fund expansion.

The CSRC created the third board in 2013 as part of its efforts to establish a multilayered capital market.

The OTC market has so far attracted more than 10,800 start-ups, with about 1,000 traded on the so-called innovation level – as distinct from the basic level, where companies with a solid earnings history and larger capitalisation are listed.

Beijing’s blueprint for transforming China into a global powerhouse of innovation added lustre to the OTC market. It was touted by the government as a fundraising platform for thousands of technology start-ups.

Beijing aims to lead world in innovation by 2050

As the CSRC temporarily suspended IPOs in the second half of 2015 following a market crash, the NEEQ became the first choice for small firms hungry for capital.

Venture capital funds, corporate investors and cash-rich individuals were the financing sources for the prospective firms.

Individual investors must have at least five million yuan (US$724,600) worth of assets including shares, bonds, mutual funds and cash to trade on the OTC market.

The direct transfer system has been broadly interpreted as a fast ticket to IPO for small firms listed on NEEQ at a time when almost 650 applicants are lining up to have their applications looked at by the CSRC.

It is likely that some of the applicants will have to wait two years before securing the go-ahead to float their shares on the Shanghai and Shenzhen stock exchanges.

The fact there are more than 300 companies trying for a direct transfer from the OTC market might crank up pressure on the regulator to fast-track approvals for the new share sales.

But some observers believe that is unlikely.

“It has been a misunderstanding among the small companies that the direct transfer system would let those listed on the OTC market launch IPOs earlier,” said Everbright Securities analyst Ivan Li. “It’s a typical case of companies and the investing public overreacting to a new policy by the securities regulator.”

Those NEEQ-listed firms applying for direct transfer are subject to stricter supervision by the regulator to ensure they comply with information disclosure rules and meet the necessary accounting standards.

A Shanghai-based auditor told the South China Morning Post that the majority of the start-ups on the OTC market would not meet the regulatory requirements for share-listing on the two stock exchanges.

The mainland stock market is often dominated by a herd mentality, with market participants frequently overreacting to government policy changes.

Between September 2014 and mid-June 2015, more than four trillion yuan of fresh capital flooded the A-share market as investors borrowed vast sums of money from brokerages and the shadow banking system to chase a strong rally that saw the market surge 120 per cent.

Investors took their cue from CSRC statements on expanding margin financing to buoy the market and support the real economy.

The rally ended abruptly as a selling stampede in the following two and a half months wiped out US$5 trillion of market value.

The central government injected about two trillion yuan of stabilising funds to stem the market slide.