The Development Plan for National Strategic Emerging Industries during the 13th Five-Year Plan Period (2016-2020), issued by China’s State Council in December 2016, said that a pilot programme for switching companies listed on the national share transfer system (the New Third Board) to the ChiNext board of Shenzhen Stock Exchange is to be launched. The pilot programme will be spearheaded by the China Securities Regulatory Commission (CSRC), the National Development and Reform Commission (NDRC) and the Ministry of Industry and Information Technology (MIIT), according to the plan.
This was the third time in 2016 that the State Council had talked about the topic, signifying an ever clearer intention by the government to introduce a mechanism for the listing of New Third Board companies on Shenzhen Stock Exchange.
Within just a few years of the expansion of the New Third Board, in 2012, the number of companies listed on it reached the 10,000 mark by the date of publication of the plan, making the board the world’s largest stock trading market by the number of listed companies. This marked a milestone in the history of China’s capital market. Being the only one of its kind in the world, the board has no peer from which experience can be drawn. There is a consensus among industry insiders that the board may shift its focus from quantity to quality of companies listed on it.
However, the answer to the question of what comes next will still have to come from top-level design, though discussion by the broader society is also necessary. One possible path is to list some New Third Board companies on the ChiNext board.
An increase in the number of companies listed on the New Third Board will only make its problems (e.g., liquidity shortage, inefficient price discovery, and poor financing ability) all the more remarkable. One solution to these problems is to expand the scope of investors – though the qualified investor threshold will stay – to include such long-term investment capital as insurance funds, social security funds and enterprise annuities, as well as Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII).
However, the process of perfecting and opening the market is bound to be a gradual one. Before this happens, high-quality companies with a considerable size that can’t have their financing needs met on the New Third Board will have the inherent drive to seek an IPO on one of the stock exchanges. Therefore, it is of particular significance to appropriately tilt the balance of policy toward these high-quality companies listed on the New Third Board by allowing them to be directly listed on the exchange. By knocking down the wall between over-the-counter (OTC) markets and the stock exchanges, the country’s capital market is to be expected to perform better with markets on different levels, complementing each other.
Like China’s regional equity markets, the New Third Board is also an OTC market, as opposed to an exchange market. The link between the New Third Board and China’s two main bourses has been an ongoing topic, as many companies whose shares are traded on the New Third Board take the board as a springboard for an IPO on either of the exchanges.
However, it should be noted that, according to article 50 of China’s Securities Law, one prerequisite for joint-stock companies to be listed on Shanghai Stock Exchange or Shenzhen Stock Exchange is to obtain the approval of the CSRC. This is currently the single-biggest legal hurdle restricting the companies listed on the New Third Board switching to the exchanges. Although the listing of any company on the board does mean the possibility of public transfer of its shares, public transfer of shares is a concept completely different from public offering of shares, which comes with a listing on either of the stock exchanges.
So far, all companies seeking an IPO on either of the two bourses have had to go through a review and approval process – that is to say, no company can be listed on the exchanges without the CSRC’s prior approval and there is no chance that companies can “bypass” this process through a listing on the New Third Board.
That is why companies listed on the board still have to take the traditional path to an IPO. As of November 2016, roughly 257 New Third Board companies were seeking an IPO on the ChiNext board. Of these companies, 12 had made an IPO with success and 63 had submitted an IPO application to the CSRC with their applications being accepted.
A shift from the current approval-based IPO system to a registration-based IPO system is necessary if the government wishes to cut the lengthy review and approval process so that New Third Board companies can directly switch to the ChiNext board without having to take the traditional IPO path. However, the date for such a shift to occur has yet to been seen, given where things are.
ROLE AND OUTLOOK
The issue in question also has something to do with the role that the New Third Board was intended to play, as well as its role in China’s multi-level capital market. The board was created to serve as a market independent from the two exchanges. Compared with the A-share market, it operates based on a distinct system and is managed by a different philosophy. It aims to provide intermediary services to small, medium- and even micro-sized innovative, entrepreneurial and growth enterprises. The sheer number of such enterprises makes the board an essential part of China’s multi-level capital market. In the authors’ opinion, there is no direct, substantial conflict between the board and the main board or the ChiNext board, because the listing of New Third Board companies on the ChiNext board does not go against the intended role of the New Third Board and will not necessarily put the board in competition with the exchange.
In the authors’ view, the New Third Board should focus on its own unique role rather than become a pool for pre-IPO candidates, or an incubator for companies to be listed on Shanghai Stock Exchange or Shenzhen Stock Exchange. Enterprises should be encouraged, either through system design or policy guidance or both, to base their choice of a share transfer market on their actual needs. Given the current situation, the regulatory authority can still, based on shared information from the New Third Board and in consideration of the listing time and operational situation of the New Third Board, take a holistic approach to the timing and regulation of new IPOs and expedite the review and approval process without relaxing the approval criteria.
Jiang Fengtao is the managing and founding partner and Liu Bing is a corporate partner at Hengdu Law Firm
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