The registration system has greatly enlivened enterprise listings. At present, the Star Market and second boards are trailing the registration system, while the registration system reform of the main boards is proceeding apace.
Senior partner and head of the securities and capital market department
Hai Run Law Firm
In contrast to the approval system, reviews under the registration system are characterised by greater flexibility and inclusiveness. The pilot project for domestic offerings and listings by red-chip enterprises provides companies with multiple offering and listing criteria, depending on their features and stage of development. Companies that satisfy certain conditions can apply to list without having shown a profit, for example.
Change of corporate form, guidance and application for offering and listing are the key stages that an enterprise is required to pass through to enter the capital markets. In the early stage of an enterprise’s development, this will usually also involve such matters as financing, equity incentives, timing of listing, and the handling of the relationship between compliance and growth. These issues can be condensed into the following six points:
The relationship between a company’s expansion and its commercial value after securitisation. An enterprise not only produces goods, provides services and creates social value, but it can be a commodity itself, storing a realisable value. In addition to continuously providing better products and services and increasing its own assets and revenues, the owner or operator of an enterprise should consider its commercial value after securitisation (valuation at the listing, acquisition or financing stage) at each stage of development, i.e., whether the commercial value of the enterprise can continuously increase after securitisation.
Securitisation can prompt an enterprise to try to achieve the best balance in terms of investment planning, product and service innovation. It is conducive to testing whether the enterprise’s investment and business results can achieve social recognition, and is also helpful in coming to an understanding of its own position in the industry. It can help in determining clearer development goals and, through a listing, acquisition or other such capital operation at the appropriate time, permits the realisation of a value increase or realisation of the investment.
The relationship among own funds, bank financing and private financing. This mainly involves the issue of whether it is to be done through private financing and when to start such a process. The financial positions and investment plans of an enterprise’s investors are not totally identical and most enterprises face funding pressures during their growth. In addition to the injection of registered capital, and arranging bank financing, whether to seek equity funding becomes an issue that requires consideration once an enterprise reaches a certain stage of development. From the experience of successfully listed enterprises, equity financing can effectively utilise private capital and resources and provide a certain degree of leverage, helpful in accelerating an enterprise’s growth.
Equity financing requires long-term planning and can be implemented at different stages of an enterprise’s growth, making it possible to avoid situations where consideration is given to financing only when an enterprise is severely short of cash and urgently needs external funding.
Independent listing, acquisition and restructuring or making it big in silence. The registration system for the offering and listing of stock has increased the inclusiveness of listing and offers multiple sets of listing criteria to choose from. However, not all enterprises are suitable for listing, as compliance with state industrial policy and review policies are basic requirements. The Star Market emphasises “hardcore” science and technology, highlighting the attribute of scientific innovation, and sets out a negative list that expressly lays out the businesses that are not suitable for listing on the market. Second boards also have relevant requirements, for example, agricultural enterprises and mining enterprises are not suitable for listing on the second boards. The acquisition and restructuring of companies listed on different segments are required to comply with these rules, but the relevant criteria can be appropriately relaxed depending on the specific circumstances of the enterprise.
Equity incentive or high pay to retain people? Many enterprises contemplating a listing offer their management and key employees equity incentives and, in practice, these have achieved good results. However, equity incentives are not a panacea and, to a certain extent, can be said to be a double-edged sword. An incentive plan needs to be formulated in light of the characteristics of different enterprises, with the key requirements being a clear objective for the incentive and clear evaluation criteria. The plan needs to incentivise employees to better themselves, to be seen to be fair and have the basis for its realisation.
Does a change in corporate form and listing require early planning or waiting until everything has fallen into place? Under the approval system, an enterprise with a good track record usually needs three to five years from starting the work associated with changing its corporate form and listing until its market debut. In contrast, under the registration system, the review period is highly predictable but the requirements in respect of guidance, compliance and information disclosure are more stringent, which usually translates into at least two years from the start of the work to listing. It is generally held that the ideal time to start the work is when the enterprise’s business model is relatively stable and it has entered a period of relatively fast growth.
Duly handling the relationship between compliance and growth. The primary task of an enterprise at its early stage is surviving the market competition. At this stage, growth is the key. And the requirements in respect of compliance in an enterprise listing are extremely stringent. It is generally held that, as its operations stabilise, an enterprise needs to endeavour to create the conditions and gradually resolve the compliance issues. Once an enterprise has started the work associated with changing its corporate form and listing, compliance becomes the cardinal principle of its operations and it must use best efforts to overcome any instances of non-compliance in its operations.
Yan Kebing is a senior partner and head of the securities and capital market department at Hai Run Law Firm. He can be contacted on + 86 10 6521 9696 or by email at yankb@hairunlawyer.com
