In many ways, the GEM is indeed a simple extension of the Main Board.
Qiao Xiaohui and Fan Junli, Caijing 22 April 2009
The new Growth Enterprise Market (GEM) is expected to open up new opportunities for high technology and small and medium enterprises, as well as the securities industry at large, but would be subject to the same controls as the Main Board.
The China Securities Regulatory Commission (CSRC) issued interim measures March 31, paving the way for the Growth Enterprise Market (GEM) to come into being with effect from 1 May 2009.
After a decade of uncertainty, GEM, a growth-oriented stock market that will serve purposes similar to those of America’s NASDAQ, is finally ready to come into being.
The move is seen as a major achievement on part of regulators as finally a “multi-layer capital market” will take shape in China too. Regulators are determined to make a success out of it and the move is being seen as an important step towards using capital markets to support development of innovative enterprises, as well as small and medium businesses.
Venture capital firms and major securities firms are upbeat. In China, new capital market innovations have traditionally signalled a redistribution of activity. After the A-Share market plunged from 6,000 to 1,600 points, it has recovered only to a level of around 2,600. Now hopes are pinned on the GEM, which is expected to boost business prospects for capital market players.
In the midst of this optimism, there are some worried voices too. “The development path chosen by the GEM will determine the future of this market,” a senior market insider told Caijing. “The rules that have been drafted so far don’t make the GEM’s future look too bright.”
The new board
According to broad estimates, several hundred Chinese companies are already planning to list on the GEM. These companies are looking towards major securities firms like Guosen Securities, China Merchants Securities, Ping An Securities, GF Securities and others to manage their issues. CITIC Securities has also set up an enterprise development fund-raising department with dozens of employees in order to prepare for arrival of the GEM.
“Everybody is busy looking for projects. Some companies that weren’t even looking to list are preparing materials for the GEM at the encouragement of securities firms,” an investment banker told Caijing.
For securities firms, the GEM represents an opportunity for their newly established direct investment departments, in addition to the investment banking arms, to generate profits.
Before the end of March, Guosen Securities had completed three direct investment deals worth a total of 100 million yuan. Companies that Guosen has directly invested in include a new energy company in Xi’an, a medical equipment manufacturer in Guangzhou and a mechanical and electrical company in Zhejiang.
The direct investment arm of Nanjing’s Huatai Securities has invested in two companies in the areas of biomedicine and chain pharmacies.
These projects are likely to list on the GEM, providing an exit opportunity to firms that have made direct investments. That isn’t very different from what venture capital firms do.
Chen Haiping, CEO of Everbright Securities’ direct investment arm, explains that investment-banking arms of securities businesses first look for viable projects. As soon as a quality project is identified, the direct investment arm proceeds to make a direct investment. Fees earned from direct investments are generally higher than profits from investment banking. This motivates securities firms to accord some degree of priority to their direct investment arms.
Later, when the recipient of direct investment gets listed, firms that have made direct investments get an opportunity to liquidate part or whole of their holdings, booking profits in the process. Direct investment deals are likely to get a boost because GEM would make it easier for small and medium enterprises to list, thereby making direct investments in such firms more attractive.
Mini board
Responding to the rising enthusiasm of the market, CSRC Vice Chairman Yao Gang has proposed that the GEM could begin trading as early as August of this year. With less than four months to go, prototypes of the trading system are being evaluated.
The new share issuance platform currently undergoing trial runs is intended to reduce the price differential between primary and secondary markets, imposing stringent restraints on speculation on the first day of listing. The Main Board limits the rise in a share’s price on the first day to 900 percent rise, but “the GEM will greatly reduce this limit,” said a CSRC official while speaking to Caijing.
Insiders close to regulatory authorities say the CSRC will consider framing access rules that match investors’ risk appetite. These access rules have not yet been framed, but could include limitations designed on the basis of investment experience, as well as the size of the account.
Song Liping, general manager of the Shenzhen Stock Exchange, told media that at the moment specific access requirements are still being discussed, but small and medium-sized investors can go through investment funds to invest in the GEM.
Public investment funds are the main institutional investment force on the Main Board, but they seem to be less suitable for GEM. Sources say regulatory authorities may allow public investment funds to float special funds specifically targeted at the GEM. At present, there is a consensus within CSRC that the GEM will not have ST, *ST and other delisting warning systems, and will not encourage shell acquisitions, restructuring exercises and other forms of speculation. However, no consensus has yet been achieved on ways of handling delistings; this issue is still under discussion.
As for the GEM’s transfer mechanism, regulators have only decided upon “voluntary upgrades, mandatory downgrades.” “It may take a year or two of operations to achieve clarity of thinking on these issues; so they are currently not being considered,” a CSRC source said.
Within the fraternity of securities firms, the GEM has picked up the moniker of “Mini Board,” although securities regulators are not officially recognizing the name. In many ways, the GEM is indeed a simple extension of the Main Board – whether it is a new exchange system, or the basic set up of a Second Board, approval for share issues still rests with the CSRC.
Approval System Remains Unchanged
The interim measures that have been published make it clear that share issues on the GEM will be approved by the CSRC. Concurrently, the GEM will establish a new share approval committee. Rumours have it that the committee will be larger than that of the Main Board and would include a higher proportion of industry professionals.
This double approval system shows no evidence of anyone having learned from the mistakes of the past. The issuance system for the Main Board has been proved to be open to possible abuse, and patchwork reforms currently being undertaken have little hope of solving the fatal flaws of the existing system.
Being unwilling to give up power over administration and approval or loosen the reins on the pace of share issues, this chronically ill system not only further justifies the “policy market” label already placed on the Main Board, but also forces regulators to bear a heavier burden.
“Having the CSRC undertake responsibility for approvals for the GEM is like asking it to tell the fortunes of high-tech enterprises. Only if the fortune teller deems them (the issuers of capital) to have a bright future will they be allowed to list,” said a source close to the CSRC.
The majority of companies on the GEM will be growth companies that have been in existence for only a short period of time. How can an approval committee decide a company’s future based on a couple years of history? “It’s like looking at a four or five-year-old child and trying to predict the future development of the child, at the age of ten or twenty years,” said an investment banker.
A more serious likely consequence of the proposed approval system is that regulatory authorities will tacitly assume at least some part of the risks of new issues, turning the GEM into a real casino-like stock market and making it difficult to cultivate awareness of risk among investors.
More than one market insider suggested that power over approvals should vest with the market. Given that the Main Board has not been left to market forces as yet, conducting an experiment with the smaller GEM might not be a bad idea.
However, there is the other side of the story. A regulatory source, sharing his concerns with Caijing, said, “if full freedom for issuing capital was given to the market, interest groups would quickly divide up the benefits while regulators would still bear responsibility for the problems.” Moreover, greater risk is inherent in the GEM. Letting the market decide on which companies can list could result in higher delisting rates, more instances of fraud and market instability.
However, an investment banker pointed out that if regulatory authorities would shift focus from approval to oversight, they could take a more detached approach to the market, and use more independent and severe punitive measures to reduce occurrence of fraud and other problems, while handing over the reign to market mechanisms. “On one board or the other, regulators need to shift roles,” the investment banker said.
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China Prepares for Its Version of NASDAQ
In many ways, the GEM is indeed a simple extension of the Main Board.
Qiao Xiaohui and Fan Junli, Caijing
22 April 2009
The new Growth Enterprise Market (GEM) is expected to open up new opportunities for high technology and small and medium enterprises, as well as the securities industry at large, but would be subject to the same controls as the Main Board.
The China Securities Regulatory Commission (CSRC) issued interim measures March 31, paving the way for the Growth Enterprise Market (GEM) to come into being with effect from 1 May 2009.
After a decade of uncertainty, GEM, a growth-oriented stock market that will serve purposes similar to those of America’s NASDAQ, is finally ready to come into being.
The move is seen as a major achievement on part of regulators as finally a “multi-layer capital market” will take shape in China too. Regulators are determined to make a success out of it and the move is being seen as an important step towards using capital markets to support development of innovative enterprises, as well as small and medium businesses.
Venture capital firms and major securities firms are upbeat. In China, new capital market innovations have traditionally signalled a redistribution of activity. After the A-Share market plunged from 6,000 to 1,600 points, it has recovered only to a level of around 2,600. Now hopes are pinned on the GEM, which is expected to boost business prospects for capital market players.
In the midst of this optimism, there are some worried voices too. “The development path chosen by the GEM will determine the future of this market,” a senior market insider told Caijing. “The rules that have been drafted so far don’t make the GEM’s future look too bright.”
The new board
According to broad estimates, several hundred Chinese companies are already planning to list on the GEM. These companies are looking towards major securities firms like Guosen Securities, China Merchants Securities, Ping An Securities, GF Securities and others to manage their issues. CITIC Securities has also set up an enterprise development fund-raising department with dozens of employees in order to prepare for arrival of the GEM.
“Everybody is busy looking for projects. Some companies that weren’t even looking to list are preparing materials for the GEM at the encouragement of securities firms,” an investment banker told Caijing.
For securities firms, the GEM represents an opportunity for their newly established direct investment departments, in addition to the investment banking arms, to generate profits.
Before the end of March, Guosen Securities had completed three direct investment deals worth a total of 100 million yuan. Companies that Guosen has directly invested in include a new energy company in Xi’an, a medical equipment manufacturer in Guangzhou and a mechanical and electrical company in Zhejiang.
The direct investment arm of Nanjing’s Huatai Securities has invested in two companies in the areas of biomedicine and chain pharmacies.
These projects are likely to list on the GEM, providing an exit opportunity to firms that have made direct investments. That isn’t very different from what venture capital firms do.
Chen Haiping, CEO of Everbright Securities’ direct investment arm, explains that investment-banking arms of securities businesses first look for viable projects. As soon as a quality project is identified, the direct investment arm proceeds to make a direct investment. Fees earned from direct investments are generally higher than profits from investment banking. This motivates securities firms to accord some degree of priority to their direct investment arms.
Later, when the recipient of direct investment gets listed, firms that have made direct investments get an opportunity to liquidate part or whole of their holdings, booking profits in the process. Direct investment deals are likely to get a boost because GEM would make it easier for small and medium enterprises to list, thereby making direct investments in such firms more attractive.
Mini board
Responding to the rising enthusiasm of the market, CSRC Vice Chairman Yao Gang has proposed that the GEM could begin trading as early as August of this year. With less than four months to go, prototypes of the trading system are being evaluated.
The new share issuance platform currently undergoing trial runs is intended to reduce the price differential between primary and secondary markets, imposing stringent restraints on speculation on the first day of listing. The Main Board limits the rise in a share’s price on the first day to 900 percent rise, but “the GEM will greatly reduce this limit,” said a CSRC official while speaking to Caijing.
Insiders close to regulatory authorities say the CSRC will consider framing access rules that match investors’ risk appetite. These access rules have not yet been framed, but could include limitations designed on the basis of investment experience, as well as the size of the account.
Song Liping, general manager of the Shenzhen Stock Exchange, told media that at the moment specific access requirements are still being discussed, but small and medium-sized investors can go through investment funds to invest in the GEM.
Public investment funds are the main institutional investment force on the Main Board, but they seem to be less suitable for GEM. Sources say regulatory authorities may allow public investment funds to float special funds specifically targeted at the GEM.
At present, there is a consensus within CSRC that the GEM will not have ST, *ST and other delisting warning systems, and will not encourage shell acquisitions, restructuring exercises and other forms of speculation. However, no consensus has yet been achieved on ways of handling delistings; this issue is still under discussion.
As for the GEM’s transfer mechanism, regulators have only decided upon “voluntary upgrades, mandatory downgrades.” “It may take a year or two of operations to achieve clarity of thinking on these issues; so they are currently not being considered,” a CSRC source said.
Within the fraternity of securities firms, the GEM has picked up the moniker of “Mini Board,” although securities regulators are not officially recognizing the name. In many ways, the GEM is indeed a simple extension of the Main Board – whether it is a new exchange system, or the basic set up of a Second Board, approval for share issues still rests with the CSRC.
Approval System Remains Unchanged
The interim measures that have been published make it clear that share issues on the GEM will be approved by the CSRC. Concurrently, the GEM will establish a new share approval committee. Rumours have it that the committee will be larger than that of the Main Board and would include a higher proportion of industry professionals.
This double approval system shows no evidence of anyone having learned from the mistakes of the past. The issuance system for the Main Board has been proved to be open to possible abuse, and patchwork reforms currently being undertaken have little hope of solving the fatal flaws of the existing system.
Being unwilling to give up power over administration and approval or loosen the reins on the pace of share issues, this chronically ill system not only further justifies the “policy market” label already placed on the Main Board, but also forces regulators to bear a heavier burden.
“Having the CSRC undertake responsibility for approvals for the GEM is like asking it to tell the fortunes of high-tech enterprises. Only if the fortune teller deems them (the issuers of capital) to have a bright future will they be allowed to list,” said a source close to the CSRC.
The majority of companies on the GEM will be growth companies that have been in existence for only a short period of time. How can an approval committee decide a company’s future based on a couple years of history? “It’s like looking at a four or five-year-old child and trying to predict the future development of the child, at the age of ten or twenty years,” said an investment banker.
A more serious likely consequence of the proposed approval system is that regulatory authorities will tacitly assume at least some part of the risks of new issues, turning the GEM into a real casino-like stock market and making it difficult to cultivate awareness of risk among investors.
More than one market insider suggested that power over approvals should vest with the market. Given that the Main Board has not been left to market forces as yet, conducting an experiment with the smaller GEM might not be a bad idea.
However, there is the other side of the story. A regulatory source, sharing his concerns with Caijing, said, “if full freedom for issuing capital was given to the market, interest groups would quickly divide up the benefits while regulators would still bear responsibility for the problems.” Moreover, greater risk is inherent in the GEM. Letting the market decide on which companies can list could result in higher delisting rates, more instances of fraud and market instability.
However, an investment banker pointed out that if regulatory authorities would shift focus from approval to oversight, they could take a more detached approach to the market, and use more independent and severe punitive measures to reduce occurrence of fraud and other problems, while handing over the reign to market mechanisms. “On one board or the other, regulators need to shift roles,” the investment banker said.
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