China tightens regulations on backdoor listings 

(Global Times)

08:57, August 08, 2011

China will raise the threshold for backdoor listings from the beginning of next month, in a move to better regulate backdoor listings and prevent insider trading, the country's securities regulator said over the weekend. 

The China Securities Regulatory Commission (CSRC) published new regulations on the country's mergers and acquisitions market on Friday, which require a company intending to go public through a backdoor listing to have at least three consecutive years of operation and a cumulative net profit of more than 20 million yuan ($3.07 million) for the previous two fiscal years. 

"The new requirements for backdoor listings are still lower than IPOs in terms of profits," said Feng Pengcheng, a professor at the University of International Business and Economics.

In a backdoor listing, a company acquires a listed firm and uses it as a "shell," injecting its own assets into the public firm. In this way, it can get its shares listed on the public stock exchanges without undergoing the regulatory and investor scrutiny required for an initial public offering.

The CSRC has also required the supervision period of companies approved for backdoor listing by independent financial advisors to be at least three fiscal years. 

Companies seeking for backdoor listings should comply with the country's industrial policies, and specific sectors such as finance and venture capital investment should be subject to separate rules, the regulator noted. 

The new regulations are aimed at better administering backdoor listings, curbing speculation and insider trading, as well as invigorating the delisting mechanism, the CSRC elaborated. 

Compared with IPOs in China's A-share market, there are still no requirements on cash flow, asset or share capital limit for backdoor listings, said a Deloitte research report released in May. 

Feng said some property developers and publishing companies would be more affected by the new regulations. "They have been active in backdoor listings as their profits are not stable enough and cannot meet the regulator's IPO criteria easily," he said.

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