n November 28, 2011, Shenzhen Stock Exchange issued the Scheme for Improving Delisting System of ChiNext (Draft for Soliciting Opinions), which added two more delisting conditions, held no brief for the back-door listing of companies that were suspended for listing, and proposed to set up the delisting & reorganizing board. Moreover, the Scheme specified the long-anticipated ChiNext delisting system and concentrated investors’ attentions on ChiNext that took moves frequently in the recent period.

Combined policies of delisting, dividend and refinancing are rolled out to improve ChiNext system

Since Guo Shuqing took the position of Chairman of the CSRC, many ChiNext-related policies have been worked out to improve ChiNext in dividend, refinancing and delisting. Firstly, with respect to refinancing, the CSRC released an announcement to permit ChiNext-listed companies to issue corporate bonds through private placement. Pursuant to the Pilot Rules on the Issuance of Corporate Bonds issued on August 14, 2007, ChiNext-listed companies shall comply with private placement-related provisions in terms of quantity of issuing objects and issuance model for their corporate bonds through private placement. For example, the quantity of issuing objects shall not exceed 10. Secondly, from the perspective of dividend, CSRC issued new rules for dividend of ChiNext, requiring companies that propose to go public in ChiNext shall add the post-IPO cash dividend policy in prospectus. Thirdly, in terms of the delisting system, the Scheme for the Scheme for Improving Delisting System of ChiNext (Draft for Soliciting Opinions) was released, indicating the launch of the delisting system in the near future. From the above measures, we learned that CSRC had great determination to improve ChiNext’s system and its existing shortcomings. During the two years since the opening of ChiNext, it has exposed some weaknesses such as changing performance of listed enterprises, demission of executives and severe three-high issues (i.e. high issuing price, high price earning ratio and high oversubscribed capital), while providing financing channels to SMEs.

Zero2IPO Research Center believed that CSRC’s recent measures were highly targeted. To be specific, the delisting mechanism was especially carried out for poorly performed ChiNext-listed enterprises, while the dividend policy defined the investors’ right to share enterprise earnings. Both of them aimed for strengthening the regulation over ChiNext-listed enterprises. Contrarily, the refinancing policy was designed to relieve concerns from enterprises about follow-up financing and their IPO size.

Policies for improving ChiNext are expected to produce effective results in future practice

Zero2IPO Research Center believed that as ChiNext is still in its infancy in China, either the capital market environment or investors shall take time to adapt, while various supporting mechanisms also have yet to be improved step by step. Ever since the launch of ChiNext, a fortune gathering effect and the lack of the delisting mechanism caused excessive earnings from IPO and relatively low costs for misconducts in ChiNext. Accordingly, the measures issued by the CSRC recently were helpful for strengthening internal inspection and self-examination of ChiNext-listed enterprises, posing a positive significance in a long run. Despite the promulgation of policies, the market paid more attentions to the effect of policy implementation in fixing defects of ChiNext’s existing mechanisms. According to Zero2IPO Research Center, the implementation of the three policies undoubtedly indicates the regulatory authorities’ determination to straighten ChiNext, though the actual results may be invalid and have yet to be tested in the market.

First of all, one of the new conditions for delisting is that the closing price of the ChiNext-listed company shall be lower than its book value per share for consecutively 20 trading days. The book value per share of ChiNext stocks is notoriously RMB1.00 in China, which means that it’s unlikely for most ChiNext stocks whose issuing prices are tens of RMB to break the buck. In other words, though stock performance is included into conditions for delisting, its practicability remained debatable.

Secondly, another new condition for delisting is that the ChiNext-listed company accumulatively receives three public censures from stock exchanges within 36 months. Most of provisions of the Public Censure Standards for Companies Listed on ChiNext of the Shenzhen Stock Exchange issued in April 2011 were designed for financial information and standardized operation of ChiNext-listed companies. Zero2IPO Research Center believed the condition is feasible in a wider range than the condition of breaking the buck, but the key is whether or not the condition on public censures could be thoroughly carried out.

Thirdly, though the new rules for dividend ensure investors to share post-IPO results of enterprises, they are not always favorable for long-term value enhancement of enterprises in a sense. Meanwhile, as the dividend policy is less related with the relief of three-high issues (i.e. high issuing price, high price earning ratio and high oversubscribed capital) and the issue of cash out by executives in ChiNext-listed enterprises and the strict control over qualifications of companies that propose to go public, it is hard to solve ChiNext’s critical defects that are denounced in the market.

Finally, the refinancing policy will be favorable for ChiNext-listed enterprises, as it plays a role of supporter more than supervisor. Against the backdrop of the lack of reasonable approach to use large sums of oversubscribed capital, refinancing is not an issue that requires prompt solution. In this context, the implementation of the policy is hard to help recover market confidence.