China bars companies from raising funds using back-door listings
Regulator tightens regulations on major restructurings by listed companies to curb speculation
China’s securities regulator has tightened the rules governing reverse merger deals by barring companies from raising funds from the domestic stock market, using so-called back-door listings.
The revised rules on asset restructuring of listed firms mean the China Securities Regulatory Commission (CSRC) has taken a substantial step toward cracking down on the over-speculative mood surrounding these “shell” firms on the mainland’s volatile stock market.
It has also stipulated that the lock-up period for new shareholders after restructuring of listed firms will be extended to 24 months from the current 12 months.
The rules have been published to solicit public opinion for one month.
Dozens of overseas-listed Chinese firms have been seeking to conduct reverse merger deals, known as backdoor listings on the mainland, to relist on the A-share market.
In a typical case, an overseas-listed firm, following privatisation, buys a controlling stake in an unprofitable A-share firm before injecting its own assets into the listed vehicle to complete a backdoor listing.
The shell firms reported to be involved in reverse merge deals have drawn frenzied buying from mainland investors, prompting the CSRC to rein in irrational buying in an effort to curb excessive volatility on the beleaguered market.
It is hoped that barring overseas-listed firms from placing shares with public investors for fundraising during a back-door listing will avoid frothy valuations of the shares in the restructured listed companies, said Zhou Ling, a hedge fund manager at Shanghai Shiva Investment.
“This means you can gain an A-share listing status but can’t raise funds during the reverse IPO,” he said.
“The longer lock-up period is aimed at preventing those shareholders from taking advantage of high valuation on A-shares to cash out.”
The CSRC cancelled the plan to create a new board for emerging industries in March, making it difficult for overseas-listed Chinese firms to engineer a backdoor listing on the A-share market.
Those that have completed privatisations would have to resort to a reverse merge deal to relist on the mainland.
