China’s top securities regulator has released draft rules that will encourage mergers and acquisitions involving listed firms, a move that could improve fundamentals of listed firms and elevate the ChiNext board’s valuation level, analysts said.
Companies involved in high-tech and strategic emerging industries that are in line with the country’s strategies will be allowed to list on the ChiNext board — the submarket filled with growth companies — through reverse mergers, the China Securities Regulatory Commission said in draft rules issued on June 20.
In a reverse merger, a private company takes control and then merges with a dormant public firm, or “shell corporation”, to get listed and bypass the lengthy process of initial public offerings. The CSRC started to ban reverse mergers on the ChiNext board in 2013 partly to contain speculation.
The new policy move will help improve the quality of listed firms on the ChiNext board and boost the board’s valuation level by replacing the shell corporations with dim prospects with high-tech companies of higher vitality, according to Zhang Yulong, chief strategist with Beijing-based China Securities.
Besides allowing reverse mergers on the ChiNext board, the CSRC released three other measures to encourage mergers and acquisitions involving listed firms, including removing restrictions on fundraising activities and profitability requirements for reverse merger deals.
“The policies will be a relatively strong sentiment boost for the ChiNext board in the short term,” analysts with Shenzhen-based CITIC Securities wrote in a note, adding that mergers and acquisitions that generate organic growth instead of valuation bubbles will prevail in the long term.