A draft for comment of the revised Administrative Measures for the Material Assets Reorganization of Listed Companies was released on the official website of the China Securities Regulatory Commission (CRSC) on 20 June 2019. This is the fourth revision of the measures since its implementation in May 2008.
As far as we recall, most regulatory rules applicable to the A-share market, not just the measures, are frequently revised and less stable. Under these circumstances, will passive adaptation to these changes be the only option? This article attempts to explore the underlying logic of the formulation and revision of securities regulations for the A-share market by comparing the contents of the rules before and after the revisions.
From previous revisions, the measures continue with the basic institutional framework provided by the Circular on Several Issues Concerning Material Assets Purchase, Sale, and Replacement of Listed Companies released in 2001. But the revisions refine the criteria for the reorganization of the material assets of listed companies, specify the requirements of share issuance for the purchase of assets from specific sellers for the first time, and modify the audit procedures of material assets reorganization. In addition, the revisions put forward further requirements for strengthening information disclosure and imposing tougher punishment for rule-breaking behaviour, marking the systematic regulation of the material assets reorganization of listed companies.
Previous revisions of the measures were focused on the criteria for the material assets reorganization of listed companies, the criteria for back-door listing, the requirements for share issuance for the purchase of assets, the requirements for supporting financing, and other substantial conditions, as well as the procedural and indemnificatory regulatory mechanisms such as enhancing information disclosure, simplifying audit procedures and imposing tougher punishment for violations.
A similarity is observed in the activity of the material assets reorganization of A-share listed companies prior to each revision. From 2009 to 2011, launch of the Growth Enterprise Market activated transactions on the A-share market and many listed companies underwent assets reorganization. Among these companies, many went public by direct back-door listing or back-door listing in disguise. Innovations were seen in transaction considerations and payment methods, to which the original regulatory rules were not detailed enough to apply. In response, the measures were revised for the first time in 2011. Many harsh opinions were issued regarding interpretation and applicability of the measures after this revision.
During 2012 and 2013, the reorganization of listed companies became active again due to the first revision of the measures and a freeze on IPOs. The regulator noticed a number of problems during the audit of large-scale assets reorganization of listed companies, such as a low threshold of and less specific criteria for back-door listing. This became one of the reasons that resulted in the second revision of the measures.
From 2014, as IPOs gradually became dammed and the audit procedures took longer to complete, many companies intending to go public sought capitalization through assets reorganization or back-door listing. As a result, assets reorganization of A-share listed companies was revitalized in 2015. The problems arising from this led the regulator to revise the measures again to further strengthen regulation. From the above analysis, each revision of the measures for stricter regulation is preceded by a tide of assets reorganization of listed companies. As a number of problems were exposed, each revision tended to bring about stricter regulation.
Next, I will provide a review of major national policies and guidelines, and a macro picture of the national economy before and after each revision. The revisions of the measures in 2011 and 2014 were made in the context of the issuance of the Opinions of the State Council on Promoting Corporate Merger and Restructuring and the Opinions of the State Council on Further Optimizing the Market Environment for Corporate Merger and Restructuring, respectively. The revision in 2016 was conducted on the basis of the “New Normal” judgment for China’s economic development. Issuance of these major national policies and guidelines generally resulted from the enormous downward pressure on economic growth across the country. This shows that each revision of the measures to loosen regulations is preceded by economic hardship that requires the advent of macro-control.
Following a review of the above factors, I would like to analyse the context of the draft for comment on the current revision of the measures. First, the content is the same as in previous revisions; second, this version links up with national policies on vigorously promoting the development of high-tech enterprises, strategic industries, and the Star Market, which opened in July 2019; finally, this revision is also in the context of the downturn in national economic development and the deteriorating macro economic environment for international economic and trade competitions.
From the analysis above, one can see the common factors behind each revision of the measures. It is not difficult to preliminarily conclude that these factors influence the formulation and revision direction of other regulatory policies and rules applicable to the A-share market. Therefore, there is an underlying logic behind the regulatory policies and rules of the A-share market that are seemingly frequently revised, less consistent or stable, and appear to be unpredictably changing and adjusting.
If A-share market practitioners like us are able to properly predict the evolution of the regulatory policies and rules applicable to this sector by active collection of information, discrete observation, and trend analysis on the basis of discovering and summarizing related common factors, our practical work will be well-guided.
Zheng Chao is a partner at Grandway Law Offices
Grandway Law Offices
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