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China's securities watchdog has set up criteria for overseas listings of subsidiaries of domestic listed companies to protect interests of public shareholders.
Parent companies have to satisfy a set of qualifications to spin off subsidiaries overseas. These include making profits for three consecutive years, separating funds raised in the domestic market over the past three fiscal years from the subsidiaries that intend to offer stocks overseas, and so on.
The rules, designed by the China Securities Regulatory Commission (CSRC) and released in full text Wednesday, also laid out information disclosure requirements and liabilities of financial consultants during the process.
They aim to give better protection to 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.
It is an international practice for listed companies to spin off subsidiaries and have them listed overseas. In recent years more domestic firms have sought such tools to meet new financing demands and build up 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 the interest of its shareholders and affect the normal business operations of the company.
Many countries therefore have designed special regulations to enhance supervision in the sector and protect the interests of public shareholders.
The CSRC's new rules are an active response to changes in the Chinese market. They will help curb irregularities during the process and give domestic investors relief, said Yin Guohong, an analyst with China Securities Co.
Normally, a public offering by a subsidiary would dilute the interest of the parent firm shareholders, but the point is standards and limits should be set to give them necessary protection, he said.
For example, the new rules of the CSRC say that the net profits of the subsidiary seeking an overseas listing should not exceed 50 percent of the overall profits of the parent listed company.
And the two should not be competing in the same business. They have to maintain independence in assets and finance.
The parent company should also be cleared of irregularities during the past three years.
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 10 percent of stakes in the subsidiary. Also, their shareholding should be approved by at least half of the public shareholders.
A set of information disclosure requirements is also expected to keep investors better informed.
Yin said the new rule might affect the progress of domestic listed firms that are seeking overseas listings of their subsidiaries as they have to adjust themselves to meet the new standards.
Those who fail to meet the profit record criteria, for example, may have to withdraw applications for subsidiaries' overseas listings.
A number of listed firms are continuing with such plans, including Shenzhen-listed TCL, one of China's biggest consumer electronics producers.
The group is planning to spin off its mobile phone sector, a core business of the group, and list it in Hong Kong.
When the plan was announced a few months ago, it aroused complaints from the group's shareholders, which weighed down the price of the stock and ultimately forced it to adjust the listing plan.
A week ago, the group announced that it would give up the form of initial public offering to list the mobile subsidiary in Hong Kong and replace it with "recommendation" and then directly list the stock on the exchange.
(China Daily August 12, 2004)
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