Stability-minded CSRC tightens checks on asset restructuring

China’s securities watchdog has taken a tough stance against asset revamps by listed firms, in its latest effort to stabilise the country’s arcane stock market, as investor confidence remains fragile.

Tightened oversight of asset restructuring, following the slowing in the initial public offering (IPO) approval process, reflects Beijing’s attempt to buoy a market that has left millions of retail investors carrying empty bags.

According to state-owned Securities Times, one out of seven A-share firms seeking asset revamp deals have seen their plans vetoed by the China Securities Regulatory Commission (CSRC) since mid-June when the stricter rules governing the shifting of assets became effective.

Of the 69 firms to go through the CSRC review procedure since, ten failed to get a green light.

In the year to mid-June, just eight of a total 122 applications to restructure businesses had been previously rejected by the regulator.

Asset restructuring deals by publicly traded mainland firms cannot now be carried out unless they are approved by the CSRC.

Before last summer’s stock market rout, its committee responsible for reviewing major restructurings – including reverse mergers, asset purchases and sales, and share placements for netting additional funds for new projects – was actively encouraged, in an effort to gradually allow market forces to play a fuller role in the process.

The regulator U-turned this year, however, after last year’s sharp falls siphoned off investor interest in buying A-shares.

“All the regulator’s moves have been aimed at stabilising the volatile market and shoring up investor confidence,” said Bob Zhou, chief executive of Shanghai-based Yinshu Capital.

“It views the tightened regulation as just a makeshift policy – but they believe it is necessary.”

The CSRC had also been intent on easing the IPO review process – and the huge backlog now of planned IPOs in the pipeline – by introducing a new registration-based mechanism in the first half of this year.

That plan would have allowed IPO applications to be approval, as long as they published all relevant information on earnings and operations, with the market then deciding their merit.

But that too was put on ice, after the CSRC took fright from concerns that an influx of fresh equity would dilute existing holdings.

According to two sources close to the CSRC, senior regulators had hoped the committee that reviews asset restructuring deals, would approve a similar market-based reform similar to the scuppered IPO plan.

“But the attempts to reform the review procedures were also foiled by the market rout,” said a former CSRC official, who now offers consultancy services to listing applicants.

“It’s no surprise the mainland regulators put their priority on market stability.”

After the boom-to-bust cycle between mid-June and late August in 2015 wiped US$5 trillion of value from the market, the CSRC delayed the series of planned reforms aimed at letting market forces playing a bigger role in fundraising and the manoeuvring of assets.

The commission’s official line was the subsequent stepped-up effort to police asset revamps stemmed from its determination to ensure the quality of listed firms, and safeguard investor interests.

It hasn’t, however, published its exact reasons for rejecting those various asset restructuring applications, but Securities Times claims at least two firms – Dianguang Technology and Beihai Gofar Marine Biological Industry – were rejected because the regulator wasn’t convinced of their earnings potential, after completing their planned restructurings.

The new rules published in mid-June also bar companies from raising funds on the A-share market via so-called backdoor listings, or reverse mergers, when a privately-held company that may not qualify for a public offering process, buys a publicly-traded company.

That move was aimed at curbing what had become unrealistic interest in the “shell” firms most likely to be targeted by strong unlisted companies looking for a quick listing

“But all that’s done is leave the market facing a liquidity problem, and the funding levels being used in share trading appear to be insufficient,” said Haitong Securities analyst Zhang Qi.

“It will be some time before investors regain confidence in A-shares.”

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