China's New Third Board sees listings plummet amid rumors of regulatory tightening

A retail investor watches share prices. Photo: Xinhua

The number of companies trading equities on China's New Third Board (NTB), designed to provide promising small and medium-sized enterprises (SME) a way to go public, has hit the 8,000 mark, amid rumors that the regulator may lift the entry thresholds aimed at enhancing the quality of the stock market.

Currently, a company seeking a listing on the NTB must meet the following requirements: the company must be established legally and subsist for at least two years; it must have well-defined business and the ability to sustain its operation; it must have a sound corporate governance mechanism and do business in a lawful manner; it must have a clear shareholding structure and the issuance and transfer of its shares must be legal; and it must be recommended and continuously supervised by a securities trader.

But there are rumors that applicant companies are facing increased regulatory pressure, because of the fact that the growth of the companies getting listed on the NTB has seen an apparent slowdown in recent months.

According to the statistics from the National Equities Exchange and Quotations (NEEQ), which operates the NTB, financial data provider Wind, and Guangzheng Hang Seng Securities, the number of newly added firms listed on the NTB plummeted to 232 in July from its peak of 743 in December 2015.

The statistics also showed that the number of companies applying for entering the NTB stood at a mere 96 in July, compared with April's figure of 1,409.

Coincidently, the NTB operator in July published an article on its official WeChat account, in which it said that it "is taking stock of and making an assessment of the business rules including the listing requirements", sparking public concerns that financial indicators including operating revenue, net assets and the amount of financing are expected to be added to the new listing requirements.

The NEEQ adopts a securities trader-enabled system, entitling them to pick companies that are qualified for a listing on the NTB based on the investors' preference and market rules, said the article. It added that the NTB will continue to put serving the growth-type firms and innovation-based SMEs in the strategic, emerging sectors on its front burner, which coincides with China's national strategy.

Industry experts said that if the NEEQ uses financial indicators as a tool to control the quality of NTB-listed companies, it will go against its original intent of serving the SMEs. But the view was denied by Li Yongchun, director of the listing business department of the NEEQ, who stressed that raising the entry thresholds is an inevitable development trend, which requires applicant companies to have the ability to streamline business models and control operational risks before entering the NTB. "The improvement of the listing requirements will allow the mature technology companies to make better use of the capital market," noted Li.

Fu Lichun, chief researcher of the NTB with Lianxun Securities, ascribed the deceleration in the growth of newly added NTB-listed companies to the board's inability to handle the large number of listed companies, which is more than double those listed at the Shanghai and Shenzhen stock exchanges. "A lack of liquidity also discourages companies from applying for entering the NTB, given that an entry may not fully fulfill their goal of seeking funds," said Fu.

In June, the China Securities Regulatory Commission (CSRC), the country's securities watchdog, divided the NTB into the innovation segment and basic segment based on the financial requirements, in a move aimed at improving market functions, reducing the investors' costs of collecting information about listed companies and enhancing the risk management capability.

It is akin to the US-based NASDAQ, which is divided into three tiers, with the NASDAQ Global Select Market requiring the highest initial listing standards of any exchange in the world.

Cheng Xiaoming, president of the Beijing-based Enterprise Nest Institute, predicted that the introduction of the segmentation approach will increase the liquidity on the innovation segment in a gradual way, despite the fact that the investment threshold of 5 million yuan set for retail investors to trade on the NTB is too high.

At present, nearly 90 percent of the investors trading on China's A-share market are retail investors, while the NTB's investors are about 200,000 investors, most of which are institutional investors.

Securities traders adopt higher listing standards than NEEQ

Although it is unclear whether the NEEQ will roll out renewed listing requirements, the securities traders have actually adopted higher listing standards in picking the qualified companies for an NTB listing than the existing criteria set by the NTB operator.

The NEEQ has explicitly expressed its support for the securities traders to apply higher listing requirements to the applicant companies due to concerns over profitability and risk control, labeling it as a key factor in promoting the sustainable development of the NTB.

As stipulated by the NEEQ, the securities traders are engaged in recommending the listing of applicant companies, making continuous supervision of the listed companies, providing related services for listed firms in stock issuance, offering brokerage services and making market, etc.

So far, there are 89 securities traders dealing with NTB-related business.

"It is common for securities traders to have their own listing standards especially in terms of operating revenue and net profit, which are higher than those set by the NEEQ. At present, the pool is big enough, and the key is how to feed the fish to get bigger rather than bringing in new fish into the pool," revealed an official responsible for NTB listing business at a securities firm.

On August 3, NTB listing business officers of the securities traders were called together at a conference held in Beijing, where the assessment on the applicant companies' ability to continue as an ongoing business was highlighted.

Urgent need for delisting mechanism

With a growing number of companies admitted into the NTB, there has been a strong call from the market participants and investors for the establishment of a detailed delisting mechanism.

Compared with higher entry requirements, Cheng said, a delisting mechanism turns out to be more important and significant to better protect the investors and match the international practice. "I call for the introduction of a strict exit mechanism, which could use stock price and trading volume as indicators for a delisting," said Cheng, who started studying the NASDAQ's trading rules in 1993.

The NEEQ has said that it is working toward releasing detailed rules for delisting unchartered, loss-making companies from the NTB in a bid to normalize the exit mechanism.

According to the statistics from the NEEQ, Wind and Guangzheng Hang Seng Securities, 58 companies have left the NTB due to reasons of acquisition by bigger companies, offering IPOs on the A-share market, failure to release fiscal reports and voluntary applications for delisting.

Industry experts said that a good delisting mechanism could force companies to think twice before applying for a listing on the NTB.

"A strict delisting mechanism will help the excellent enterprises stand out and serve as an effective tool to promote the sustainable development of the NTB," said Bu Naxin, chief researcher of the research center of the new third board of the China International Association for Promotion of Science and Technology.

"The practical experience of the NASDAQ has attested to the fact that when regulatory policies and mature equity investment mechanism are well prepared, the birth of great enterprises is just a matter of time," said Bu.

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