Regulators of China's NASDAQ-style growth enterprise board (GEB) are working overtime to iron out the thorny issues arising from the conflicting interests of the various market participants amid the countdown to its launch later this year.
The urgency of the matter was brought to the fore during a forum organized by Shenzhen Stock Exchange recently in Shenzhen. More than a dozen attendees, representing the exchange, the China Securities Regulatory Commission (CSRC), and market intermediaries participated in the forum.
Among the key issues hotly debated were the cost of listing, duration of the lock-up period and supervision of advisors and sponsors.
Market intermediaries said the high initial listing cost would discourage many cash-starved small- to medium-sized companies from raising capital in the proposed market.
"The proposed cost for listing on the GEB is similar to that on the main board, but the capital we can raise on the GEB is limited by the rules," said Wang Shufu, president of Shenzhen Maslong Information Technology Co. "We believe that there should be a statutory cap on the fees charged by brokers and sponsors."
Representatives of the broking and banking community explained that the high fees were necessary to cover the cost arising from additional responsibilities in information disclosure required by the rules and the prolonged period of supervision required to ensure that all listing conditions are met by the SMEs.
Yang Wenming, a lawyer from Guangdong, said that the lowest fee that many brokers would charge for companies seeking to raise capital on the GEB was 10 million yuan, which is more than what a typical SME can accumulate as average profit in two years.
IPO sponsorship is a high-profit-margin business, Yang said. There should be a way for market intermediaries to balance their profits and risks and come up with a fee that is acceptable to issuers, he added.
CITIC Securities and China International Capital Corporation (CICC) were among the first to get licenses to do direct investment business in 2007. So far, nine brokerage firms, including Haitong Securities and Huatai Securities have obtained approval from the CSRC to invest in companies' equity and many more are known to have applied.
Though excited by the prospect of having an additional exit channel, venture capital firms have expressed reservations about what they considered to be the duration of the lock-up period, which is for as long as that on the main board.
"We usually take five years to nurture a company into fit enough shape to go public," said Liang Guozhi, investment director at Fortune Venture Capital Co. After the listing, "we will need to wait another two years to dispose the entire holding and realize our investment return because of the share lock-up restrictions and monthly trading limit", he said. "That's just too long."
Like other venture capitalists, Liang said that he preferred quick returns rather than make a higher profit after an unnecessarily long wait. That is because venture capitalists are always scouting for new investment opportunities and would therefore be keen to have sufficient cash on hand to take advantage of opportunities as they arise.
In the forum, there were suggestions on making special provisions for venture capitalists by binding them to a shorter lock-up period that usually applied to other original shareholders.
Other issues raised at the forum included the introduction of provisions to hold accounting firms responsible for the integrity of their audits of companies listed on the GEB.
The draft listing regulations released earlier in May seeks to strengthen the power of accounting firms by requiring the exchange to remove companies from listing when their accounts are questioned or qualified by the auditors. To prevent potential abuse of such power, Zheng Xueding, partner of Carea Schinda Certified Public Accounts, recommended the introduction of a civil compensation mechanism that can hold auditors accountable to the public.
The CSRC is eliciting opinion about the draft listing regulations and the final rules are likely to be released within two weeks.
(China Daily May 21, 2009)
