Investment bankers in China scrambled last weekend to update their clients about new opportunities in the Chinese IPO market.
Late on August 23, the China Securities Regulatory Commission (CSRC) issued a draft regulation, allowing listed companies to list their spin-off subsidiaries domestically.
This is a groundbreaking event, as spin-offs from Chinese listed companies have not been able to list on the A stock market before. For investors, it increases their visibility of potentially valuable assets under big conglomerates and gives them more opportunities for direct investment.
“We are looking into the possibilities,” one investment banker in Shanghai told FinanceAsia. “It is good for us as it allows us to have more proposals for our clients.”
The draft regulation allows companies which are listed and have been profitable for three years to split up their business. A subsidiary can only be spun off if it contributes less than 50% of the parent company's profits. The regulation also bans financial businesses from being split up from the parent company and floated as a separate company.
Apart from splitting up subsidiaries, CSRC also released draft regulations to dictate how STAR Market companies can restructure their assets. It gives more freedom for companies that are listed on the Nasdaq-style board. The regulations say that companies can apply the laws of where they are registered, even overseas, when making internal decisions about restructuring.
“The regulation for restructuring follows the principle of an open market,” Chen Jie, managing director and director of the M&A department at CICC commented. Chen expects more merger and acquisitions for STAR Market-listed companies.
But this does pose challenges.
As more tech startups go public, especially if they are registered overseas, new models and structures will be involved in M&A activities on the Chinese stock market. And some are worried that new activities will lead to slack supervision during the listing process. Due to the difference between jurisdictions, it was difficult for Chinese regulators to carefully examine transactions involving companies registered overseas.
To answer these concerns, the CSRC has provided a solution with more requirements for law firms that are involved in IPOs. In a third draft regulation issued on August 23, the watchdog detailed new requirements for law firms; that they investigate entities that are preparing to go public, instead of relying on the audit opinion as they did previously.
“It sounds like law firms will do parts of the auditing job,” one lawyer in Beijing told FinanceAsia jokingly. “The review process will be even more complicated. But we will see fewer failing projects coming to the Chinese stock market.”
