‘Shell company’ shares plunge as China tightens back-door listing approvals

Stricter rules governing reverse mergers sends shell companies share prices tumbling Monday

PUBLISHED : Monday, 20 June, 2016, 3:23pm
UPDATED : Monday, 20 June, 2016, 10:19pm

Shell companies plunged on the A-share market on Monday after China’s securities regulator issued its most stringent regulation draft on Friday aimed at tightening supervision of back-door listings.

Companies marked with “ST” and “*ST” in their ticker, indicating continued losses or other delisting risks, saw their share prices drop across the board. A total of 40 companies among the 58 traded companies in this sector declined as of the end of trading Monday, while 17 companies fell by the daily limit of 5 per cent, according to mainland data provider Eastmoney.

Analysts said the draft regulation regarding restructuring by listed firms, issued by the China Securities Regulatory Commission (CSRC) on Friday, exceeded market expectations in terms of its strictness and would be effective in cooling down the overheated market for shell companies, including those with the “ST” symbols.

“Back-door listings will become much more difficult if the regulation draft issued on Friday becomes valid. The strict limit for fund raising will also discourage back-door listing attempts ... it will also scrap the value of the shells,” said Adam Xu, a mutual fund manager based in Shanghai.

Back-door listings will become much more difficult if the regulation draft issued on Friday becomes valid
Adam Xu, Shanghai fund manager

In China, listed companies suffering from poor financial performance will often transfer control of the listed entity to other investors through a back-door listing, also called a “reverse merger”.

In addition, controlling shareholders of listed companies that have received regulatory punishment or other warnings may invite another company to take over the listed entity.

It is easy for speculators to drive up share prices of these “shell companies” based on potential restructuring deals that may inject quality assets into the listed entity.

According to the draft, the CSRC will prohibit companies from raising funds on the stock market to accomplish reverse merger deals.

Separately, the lock-up period for new shareholders in the restructured listed companies would be extended to 24 months from 12 months to prevent short-term speculation.

In addition, controlling shareholders cannot sell their listed companies as “shells” if they have broken rules or securities laws during the past three years.