I have already introduced the theme but today I want to stress some facts before to proceed with the description of these transactions. It is also necessary to spend a few words on the functioning of the IPO, because with other entries I will describe more in detail the functioning of the Chinese Bourses.
China is one of the world´s leading economic powers today, and confidence in the world’s second-largest economy is still mounting as we can witness from the ever
increasing foreign direct investments
(FDI). It is foreseeable and predicted China soon will become the new frontier for capital investments. In fact, recently China is bolstering the strength of its capital market in a move to encourage M&A activity, in addition to the restructuring of listed companies. One of its financial center, Shanghai, now ranks as the
sixth most competitive financial center worldwide
and its importance it is expected to growth in the near future.
It is a matter of fact that Chinese deal activity in this sector, namely “M&A”, both inbound and outbound, has been a key driver of the global M&A rebound in 2010. 2011 and 2012. Analysts said that domestic strategic M&A activity is expected to increase in industries previously only accessible to State-owned enterprise. Meanwhile foreign investors are expected to re-enter the market at volumes last seen before the financial crisis.
It is also worth stressing that Shanghai is making moves to enhance its mergers and acquisitions market with the aim to make itself a global financial hub by 2020 (an ambition which was approved by the state Council in March 2009). Just to confirm the importance China is giving to its financial markets it is worth reporting that the Shanghai Stock Exchange will implement “round-the-clock trading” by 2020. No Stock Exchange in the world has yet implemented 24-hour trading. Furthermore, the local government is considering setting up a
China Mergers and Acquisitions Association
in Shanghai, and according to figures from the Shanghai headquarters of the People’s Bank of China, there are 11 financial institutions running M&A loan business in the city. This represents another confirmation of the trend which at present China is experiencing.
Chinese authorities are accelerating the process to allow overseas companies to float shares in the domestic A-share markets as a way to ease and facilitate inflows of new investments and to give Chinese investors new room to allocate their money.
The “international board” was to be launched at the end of 2011, however it should fully functioning and operating in 2013. However, it seems that the approval procedure for overseas companies seeking listing on the board will be made simpler and faster than for domestic companies. The central bank hopes the international board will be launched and be operative as soon as possible, adding the market and industry demand for the board is real. The securities regulator affirmed that overseas companies could list on the new board through initial public offers (IPO) or depositary receipts traded in Chinese stock exchanges. The China Regulatory Securities Commission (CSRC, www
http://www.csrc.gov.cn/pub/csrc_en/
) is also exploring the possibility of overseas companies issuing yuan-denominated bonds and other debt instruments. The launch of the international board is being widely watched because it could draw a string of multinational companies to the mainland fundraising pool.
About IPO:
The
China Securities Regulatory Commission
introduced the
IPO sponsor system
in 2004: under the system, Chinese companies seeking an IPO on the shanghai or Shenzhen exchange are required to obtain the endorsement of a qualified sponsor. The sponsor are to complete a due diligence checklist and sign a declaration that they are aware of the legal consequences before they recommend an IPO candidate to the commission for approval. The sponsors are required to make sure financial data and other information provided in the IPO prospectus are truthful. Sponsors also continue to oversee disclosure information, to be sure it is valid, for one or two years (depending on the trading board) after the company floats its shares. The system is aimed at improving the quality of public companies and better protecting investors’ interest. Hua Sheng, president of Yanching University in Beijing, told a forum in Beijing in November that the main problem is the sponsor system’s mild punishment of wrongdoing by sponsors and their representatives. Regulations issued by the securities commission stipulate that if a public company’s earnings decline more than 50 percent in the year went public, or if there are any irregularities in information disclosure, the IPO sponsor will be banned for 3 to 12 months, and in serious cases, a sponsor’s business license can be revoked. Gaoxin Zhangtong Co. Ltd., a tube maker, was delisted last year (2010) after reporting a loss in three consecutive years after going public. The punishment given the two sponsor representatives with Bohai Securities Co. Ltd. was a “notice of criticism” from the commission. “The punishment should be much tougher”, Liu Jipeng, a professor at China University of Political Science and Law, wrote on his blog. “The situation now is that nobody is to be blamed if there are problems. The sponsors are actually committing fraud at no risk”. Hong Kong also has an IPO sponsor system but is much tougher when it punishes wrongdoing. Sponsors face huge fines and possible criminal charges if their transgressions are caught: e.g. Hong Kong Economic Times reported in September 2011 that Mega Capital (Asia) Co. Ltd. faces fines of up to HK$ 100 million ($ 12,85 million) after making inaccurate statements in the prospectus of Hontex International Holdings Co. Ltd. Even in Hong Kong, where the sponsor system dates to 1999, there are flaws. Late last month (November 2011), the Hong Kong Monetary Authority said it found inadequacies in the activities of five banks that sponsor IPOs in the city, including their handling of the due diligence and disclosures in IPO prospectuses. However, the sponsor system is only a temporary method adopted on the way to China’s IPO mechanism reform. China’s stock issuing should soon go from administrative examination and approval to registration. Under the registration system, which is used in the United States, regulators check only the format of a company’s information disclosure. Investors decide which companies will survive, and they correct wrongdoing through legal action. In the US if a company makes false statements in its prospectus, investors will make it pay a huge price through class actions. Following the rise of its IPO market in recent years, development of China’s mergers and acquisitions (M&A) market also has picked up. As a result, the securities commission is introducing a financial adviser system, a counterpart to the IPO sponsor system.
– Cristiano Rizzi