Across The Border

Calls for more scrutiny of China’s New Third Board listings after some firms report zero sales

PUBLISHED : Friday, 02 September, 2016, 5:17pm
UPDATED : Friday, 02 September, 2016, 11:01pm

More than 20 companies listed on mainland China’s New Third Board reported zero sales for the first half of this year, ratcheting up pressure on the securities regulator to step up policing of the over-the-counter (OTC) market.

Among the nearly 8,900 firms listed on the National Equities Exchange and Quotations board, 22 firms failed to rake in a single penny of sales in the January to June period, while more than 2,200 startups on the board posted losses.

“It is increasingly important for the regulator to keep a close watch on the OTC market,” said He Yong, a vice president with investment consultancy New Third Board Club. “Companies with growth potential, not ‘shell’ firms are supposed to be traded on the board.”

The New Third Board became a primary listing venue for thousands of start-up firms this year after the China Securities Regulatory Commission (CSRC) scrapped plans to set up a board slated for emerging industries and wanted to ease the initial public offering (IPO) approval procedure.

In August alone, about 900 firms flocked to the OTC market to earn a listing status.

Early this year, the CSRC put on hold a plan to embark on a registration-based IPO mechanism to shore up investor confidence. Worries about an influx of fresh equity could have further damaged the weak market if the new IPO system was implemented.

It is increasingly important for the regulator to keep a close watch on the OTC market
He Yong, New Third Board Club

Instead, start-ups turned to the OTC market which has a lower threshold for companies seeking to raise funds.

Two sources close to the CSRC said that the regulator hoped to use the New Third Board as a testing ground for the registration-based IPO system, with market forces given full play to decide the worth of the companies.

Under the registration-based system, the regulator would relinquish its responsibilities for assessing the earnings potential of listing applicants while allowing them go public as long as all the documents about company operations were published.

Giving technology start-ups wider access to capital markets was in line with Beijing’s efforts to bolster entrepreneurial spirit as a way of combating the economic slowdown. But the stock market rout in mid-2015 prompted the securities regulator to shelve the plan to reform the IPO system.

Beijing officially launched the New Third Board in 2013, formerly an OTC market for companies delisted from the stock exchanges, to attract technology start-ups.

In May, the CSRC divided the New Third Board into two levels, allocating companies with robust financial performance or a bigger market capitalisation to the higher “innovation level.”

Those listed on the “innovation level” could technically be directly transferred to the Shanghai or Shenzhen stock exchanges.

But calls to tighten oversight on the New Third Board have been increasing amid a flood of new listings on the market. An investment banker who asked not to be identified said she found “numerous” cases of misleading information and even fraud in the balance sheets and listing application documents of clients wanting to list on the board.

Among the 22 companies that reported no sales for the first half, Dalian-based Edgesoft, a computer software developer, said it lost all its business after an outsourcing contract with Japanese clients ended. This is true of a large portion of mainland start-up firms that rely on just a single contract with a major client but still describe themselves as “high-growth” and leading technology firms in the country.

The CSRC has recently forced New Third Board-listed firms to self-examine their earnings, fundraising and taxation, but analysts said it wasn’t enough to ensure the overall health of the market.

“Concrete actions should be taken to regulate the board before it becomes a casino-style market,” said Cao Hua, a director with Tripod Capital. “Those underachieving companies with no solid businesses and intermediaries found to help report fraudulent earnings should be severely punished.”