Vice Chairman Yao Gang of the China Securities Regulatory Commission (CSRC) spoke, on November 6, 2009, as a guest in an online interview with www.GOV.cn on the topic of tightening supervision over the Growth Enterprise Board (GEB) to secure a stable market.
Anchor (A): Would you please introduce to us the orientation of the GEB market and the characteristics of the companies on the GEB?
Yao Gang (Y): The GEB, integral to both China’s multi-level capital market system and on-floor trading market, serves as a vital platform to carry out the strategy of building an innovation-oriented country and support the start-ups at their growth stage. The launch of the GEB is intended to promote the development of independent innovation enterprises and other start-ups of a growth nature.
In terms of the enterprises whose applications have been accepted by the CSRC, companies on the GEB have the following features: first, they have distinct sector preference, with a higher proportion of companies engaged in emerging industries such as electronics and information, new material, new energy and bio-pharmacy than that on the Small and Medium Enterprise Board; second, they enjoy a great growth potential. The first batch of accepted enterprises boasts annual growth rate of 70% and 67% in their operating revenue and net profit, respectively, from 2006 to 2008; third, they have a strong innovation capability. A majority of the companies deal with new businesses or have innovative business models. Quite a lot of them are featured by an asset-light structure, which represents a diversified and novel industry trend; fourth, they are powered by technology. 77% of the first batch of accepted enterprises are recognized as high-tech enterprises by the state.
A: The investor appropriateness management system has been established for supervision over the GEB. Could you explain to us the reason for its establishment?
Y: Some once suggested naming it “qualified investor system”. However, considering that the phrase “qualified investor” is not that easy to define, we choose the “investor appropriateness management system” in the end. The system is not created to restrain people from investment in the GEB, but to ensure that investors understand the market risk and invest through certain procedures. For instance, they have to open accounts at the securities business departments instead of online account-opening, and write down the words like “I have understood the market risks” when signing the risk disclosure statements to ensure that they are fully aware of the investment risks. Investors with less-than-2-year investment experience will go through a cooling-down period by making a special statement that “I don’t have more-than-2-year trading experience, but have read and understood relevant rules and risks and is capable of bearing relevant risks” 5 days before starting trading on the GEB.
A: How do you evaluate the implementation of the investor appropriateness management system so far?
Y: The system, introduced to the GEB for the first time, has been implemented effectively. Around 9.6 million investors opened their accounts through the above procedures, with 920,000 accounts actually participating in the trading on the secondary market of the GEB, accounting for 1/10 of the total number of the accounts. This indicates that large numbers of investors still wait for the timing and make decisions prudently.
A netizen named “Creator”: Can my company at start-up stage apply for listing on the GEB? Which kind of enterprises is suitable for listing on the GEB?
Y: It is a good question. There has been a lot of talk about this question online. Some holds that China’s GEB market is actually not a GEB market since enterprises at their start-up stage cannot be listed on this market and those listed on the market have come into being for a long time and not in their early stage.
China’s GEB market, as it is designed, is not targeted at enterprises at start-up or “seed” stage, but at those having existed for a while, owned some assets, occupied some market share with their products, boasted a good profitability and been in their growth stage. It is also what we learn from overseas practices.
Lots of overseas GEB markets failed due to loose requirements, which allow immature enterprises to enter the market.
Therefore, although not as stable as those on the main board, the enterprises listed on China’s GEB market enjoy a higher stability than those at early or “seed” stage. Low requirements for listing on the GEB in some countries can be attributed to the insufficiency of the potential companies planning to get listed. Thanks to 30 years of reform and opening up, China’s economy has always been on a fast track, with the country having come into the stage of industrialization. It has an abundance of potential resources. The requirements we set for listing on the GEB is to ensure an adequate supply of new blood for the market. Therefore, enterprises at their initial stage can not enter the GEB market. Those on the market should meet the requirements in terms of duration, profitability and market share and withstand the test of market.
A: Does that mean all enterprises, having done business for 3 years with a good profitability, are suitable for listing on the GEB?
Y: They have to comply with the requirements for listing on the GEB. There are two sets of financial indicators for listing on the GEB worth of attention. The first set requires a minimum total profit of RMB10 million and the profit on the rise in the last 2 years. The second set is for those with acceptable profitability yet good growth potential. For them, the profit and the operating revenue in the past year must not be less than RMB5 million and RMB50 million, respectively, with the growth rate in its operating revenue in the last 2 years not lower than 30%. In addition, other legal requirements including 3-year duration should also be met.
A netizen named “Technical Personnel”: Key technical personnel are crucial to the stable operation of the enterprises listed on the GEB. Is there any system established to ensure the stability of those personnel?
Y: Some of the enterprises on the GEB rely on a certain product or a few persons, which is also one of the common characteristics of most enterprises at start-up or growth stage. To improve the stability of the enterprises on the GEB, we set a limit for shareholders’ shares sale and require a lock-up period. Those key personnel are expected to be imposed with a longer lock-up period at the time of shares listing to convince the investors that they are willing to grow with the company and will not abscond with the money abruptly. According to the provisions of the rules for listing on the GEB, listed companies may, in line with the Articles of Association, specify the shares lock-up period for their key technical personnel and senior management.
A netizen named “Persistence”: What does the CSRC think of the fact that the actual amount of the funds raised by the first batch of enterprises listed on the GEB is in excess of the planned amount?
Y: Concerning this hot issue on the market, the CSRC doesn’t want to see the excessive fund raising. Since the law prescribes that there shall be a minimum public offering proportion for the listing of a company, the CSRC required the enterprises to lower their issuance amount once a potential anticipation for excessive fund raising was found out upon review. Most enterprises met the minimum requirement for issuance and listing. However, even though the issuance amount has been adjusted to the minimum, the IPO inquiry still turned out to be excessive fund raising. This issue can only be settled through follow-up supervision.
The CSRC set a stricter regulation on management of excessive funds raised on the GEB than on the main board. For example, the funds, exclusively used for major business, shall be deposited in special accounts. The company’s sponsor shall pay special attention to the funds deposit and usage in its continuous supervision. To solve this problem, the overseas practice of stock shares issuance may be taken into consideration in the future. At present, there are still obstacles in terms of law, with deeper research needed in practice.
A netizen named “Man from Beijing”: What do you think of the get-rich-quick phenomena on the GEB?
Y: I think it is inappropriate to use the word “get-rich-quick” here. According to incomplete statistics, there are tens of thousands of joint stock companies in China currently, with less than 1,700 listed companies. Most enterprises fail at their start-up stage. The substantial appreciation in shares after listed on the GEB is actually a mechanism to encourage entrepreneurship. Through this mechanism, companies with real innovation and growth capability that represent the trend of economic development and promote the national economic structure adjustment and employment will stand out, which would benefit China’s economic development in an all-around way.
The liquidity premium and appreciation of shares held by shareholders after company listing is not a phenomena particular to the GEB and China’s stock market. It also exists in overseas capital market. The GEB, however, may present a more explicit version.
A netizen named “Red Plum Blossom”: How does the securities regulatory authority prevent over-speculation on shares on the GEB?
Y: Regarding the active trading and large increase rate on the first day, the Shenzhen Stock Exchange (SZSE) took a measure called “Circuit Breaker”. On the first listing day, trading of shares will be suspended for 30 minutes if its price exceeds the opening price to some extent, then resumed, and suspended against when the increase rate hits 50%. Through this way, investors are cooled down. If the price increases to 80% higher than the opening price, trading of the shares will be suspended till 3 minutes before market closure, which means the price will remain unchanged till 14:57. According to the statistics of the first day, trading of lots of shares was suspended, with their prices retreating after surge on the afternoon of the very day, which proved the usefulness of the “Circuit Breaker”.
In addition, the SZSE also made arrangements for its daily supervision and case filing for investigation by keeping a close eye on and making direct warning to those on the blacklist that frequently place and withdraw orders and conduct abnormal trading behaviors to improve the supervision accuracy. All this has made positive effects according to the trading on the following days.
A netizen named “108”: What else needs to be perfected for China’s multi-level capital market after the successful launch of the GEB? Has the task of building a multi-level capital market put forward by the State Council been accomplished？
Y: The launch of the GEB makes a good complement to the multi-level capital market. Previously, there were only main boards in Shanghai and Shenzhen (the Small and Middle Enterprise Board and the Large Enterprise Board). However, a true multi-level capital market is composed of an exchange market (on-floor market) and an off-floor market (over-the-counter market) which allows enterprises to list and transfer shares. Our upcoming work, following the launch of the GEB, is to perfect the construction of the off-floor market.
The existing system of shares transfer conducted by entrusted securities companies is a platform provided for joint stock companies, which are not qualified for listing on the GEB, to transfer shares. At present, only enterprises in Beijing Zhongguancun High-tech Park, which meet relevant requirements, are entitled to make a trial run on this platform. We, based on the pilot experience, plan to expand the pilot scope to other eligible high-tech parks next year to further perfect the off-floor market.
A netizen named “At a Loss”: Is there a possibility that enterprises listed on the GEB may enter the main board market in future?
Y: I think the answer is a strong affirmative. But that doesn’t mean that companies listed on the GEB market have to enter the main board when they reach a certain scale. It is not compulsory. Some large-scale enterprises on the American NASDAQ stock market, including Microsoft, don’t get listed on the New York Stock Exchange (NYSE) and continue their shares trading on the NASDAQ market although they are fully qualified for listing on the NYSE. Thus, it is allowable to switch to the main board market, but not compulsory. The exchange will set a series of rules for market switch in the days to come. It is still possible for the future that some large-scale enterprises with promising prospect for development continue their shares trading on the GEB market.
A netizen named “Ups and Downs”: It is reported that the GEB has a greater delisting risk than the main board. What are the features of the GEB in term of the delisting system?
Y: We don’t want to see the GEB market turning into a market for speculation on back door listed shares. Thus, the direct delisting system was established in the GEB market design with a view to realizing the survival of the fittest. The standards for delisting of companies on the GEB are stricter than those for the main board, with some special provisions. For instance, if the accumulative trading volume of a company’s stock is less than 1 million shares for 120 consecutive trading days and the situation cannot be improved within a specified time limit, the company shall be delisted. Considering the great delisting risk and direct delisting arrangement, investors are cautioned of potential risks in their investment.
A netizen named “the highest excellence is like that of water”: Why did the first batch of enterprises get listed on the GEB in a centralized way? Will the centralized listing cause capital scarcity on the market?
Y: When the prospectuses disclosed before the listing told the public that the companies would get listed in a centralized way, there were discussions that the first-of-its-kind centralized issuance and listing of 20-30 stocks may lead to capital diversion or insufficiency on the market. We thought at that time that the GEB is a new thing and according to our previous experience, Chinese investors are likely to speculate on new shares. To prevent excessive speculation effectively, we learn from the centralized issuance and listing on the Small and Medium Enterprise Board to issue shares and list companies in batches with an aim to prevent excessive speculation on single shares.
As enterprises on the GEB are on a small scale with a comparatively small financing amount of RMB15.5 billion in total for 28 stocks, less than that of RMB18.9 billion for a single stock (Metallurgical Corporation of China Ltd.) on the Shanghai Stock Exchange (SSE), the main board market will not experience the capital diversion or scarcity. Practice has proved that the index of the main board market was on the rise on the very day of enterprise listing on the GEB, with no sign of capital diversion. The worries are mainly results of psychological effects.
A: A great many netizens are not satisfied with the enterprises’ high IPO P/E ratio (price-to-earnings ratio) when they were listed on the SZSE on October 30. Why didn’t the CSRC offer guidance to their issuance prices?
Y: That’s a good question. I have noticed the talk on the internet and the strong call for the CSRC’s intervention in the prices. Back in 2008, when enterprises were listed on the main board, there was a lot of talk on the internet such as why the CSRC guided the issuance price and the guidance would distort the price formation mechanism.
Actually, the CSRC didn’t unduly intervene in the price, but gave some instruction to over-high price. One of the most significant characteristics of market economy is that the price is decided by both the supply and the demand. People working for the government will never be smarter than the market.
Besides, the “Securities Law” also stipulates that the CSRC shall not engage in the pricing of the issued stock, which shall be decided on by the issuer and the underwriter upon negotiation.
People all said that investors offered a high price. Unfortunately, it is up to the market rather than the CSRC. It’s a basic principle we have to follow.
A: What is the difficult point in supervision over companies listed on the GEB in your point of view?
Y: I have to say it is the less stability in enterprises listed on the GEB than those on the main board. Since the enterprises listed on the GEB, especially those heavily relying on a certain product or a few persons, are on a small scale and not strong enough to bear high risks, their stability is relatively low, with their stock prices prone to fluctuate.
Concerning the above characteristics, we set a stricter requirement for information disclosure of enterprises listed on the GEB to make sure that investors are aware of their changes in time. To ensure the implementation, great efforts should be made to intensify the supervision over information disclosure of enterprises on the GEB. It is no easy task.
To tackle the difficulty, the CSRC and the SZSE have devoted themselves to the following aspects:
First, the timeliness and completeness of information disclosure will be improved to boost the transparency of the companies listed on the GEB. The published “GEB Stock Listing Rules” made a detailed stipulation on information disclosure.
Second, as the business and profit models of enterprises listed on the GEG are relatively novel with large industry discrepancy, we will make pertinent researches and formulate special regulations on information disclosure of enterprises in special industries.
Third, we will, after the enterprises listed on the GEB operate for a period of time, rationalize the existing rules for information disclosure and adjust and complement relevant rules according to the characteristics of the enterprises on the GEB with a view to gradually perfecting the information disclosure rules.