The China
Securities Regulatory Commission (CSRC) has set up criteria for
overseas listings of subsidiaries of domestically listed companies
to protect interests of public shareholders.
Parent companies have a series of conditions to meet before they
may spin off overseas subsidiaries. These include operating
profitably for three consecutive years and separating funds raised
in the domestic market over the past three fiscal years from the
subsidiaries that intend to list overseas.
The regulations, released by the CSRC on Wednesday, will also
include information disclosure requirements and liabilities of
financial consultants during the listing process.
Their purpose is to protect the interests of the public
shareholders in the domestic market and ensure that the parent
firms can maintain sound operations after their subsidiaries are
listed overseas, a CSRC spokesman said.
In the international markets, listed companies frequently spin
off subsidiaries and list them abroad. In recent years, more
domestic firms have sought such tools to meet new financing needs
and build their positions in international markets, the spokesman
said.
However, if the parent company transferred most of its core
assets to the subsidiary, it would seriously erode its value to
shareholders and affect the normal business operations of the
company. Thus, many countries have implemented regulations to
enhance supervision and protect the interests of shareholders.
The CSRC’s new rules will help curb irregularities and reassure
domestic investors, said Yin Guohong, an analyst with China
Securities. Normally, a public offering by a subsidiary would
dilute the parent company’s shares, so standards and limits must be
set.
For example, the new CSRC regulation limits the net profits of
the subsidiary seeking an overseas listing to 50 percent of the
overall profits of the listed parent. Also, the two must not be
competitors in the same business and they have to maintain
independence in assets and finance.
The parent company should also be free of irregularities for
three years preceding the subsidiary’s listing.
Moreover, to avoid manipulation by affiliated companies or
individuals, board members and senior managers of both the parent
firm and the subsidiary should not hold more than a 10 percent
stake in the subsidiary. Their holdings must be approved by at
least half of the shareholders.
Yin said the new regulation might delay the plans of some parent
companies. Those who fail to meet the profit record criteria, for
example, may have to withdraw applications for subsidiaries’
overseas listings.
The Shenzhen-listed TCL group, one of China’s biggest consumer
electronics producers, is adjusting its plan to spin off its mobile
phone operation, a core business of the group, and list it in Hong
Kong.
When the plan was announced a few months ago, shareholders were
unhappy. Share prices declined and ultimately the group adjusted
its listing plan. Earlier this month, the group announced that it
would give up the IPO of its mobile subsidiary in Hong Kong and
replace it with “recommendation” and then directly list the stock
on the exchange.
(China Daily August 12, 2004)