China issues draft rules on A-share spin-offs

IFR 2298 31 August to 6 Septembert 2019
2 min read
Karen Tian

China’s securities regulator has issued draft rules to allow A-share companies to spin off units through an IPO or backdoor listing for the first time.

The proposed rules, released by the China Securities Regulatory Commission, would allow listed companies to spin off subsidiaries on all of the mainland’s A-share stock markets.

At least nine A-share listed companies have said they plan to spin off units in the domestic markets since regulators hinted in January that Shanghai’s new tech board would allow the move once a company reaches a certain size.

In April, Shenzhen-listed printer TungKong said it was considering a separate listing for wholly owned cloud storage unit TungKong Ruiyun Data Technology, with the Star board its preferred venue.

“Market participants assumed that the Chinese regulator would bring the reform only to the tech board but the scope of the draft rules goes beyond those expectations. Besides, the rules also welcome backdoor listing in addition to IPOs,” said a banker.

Under the proposed rules, companies that have been listed for more than three years and made profits for three consecutive years can spin off a subsidiary. Excluding assets of the proposed spin-offs, the aggregate net profits attributable to shareholders should have been not less than Rmb1bn (US$140m) for the three years.

According to a report from Pingan Securities, 192 of the 3,692 A-share-listed companies meet the criteria.

The scale of the spin-off is also restricted to no more than 50% of the parent company’s net profit and 30% of its net assets in the latest year.

Senior management and employees of the parent companies and the proposed spin-offs cannot hold more than 10% of the spin-off’s share capital before the IPO.

An analyst at a domestic brokerage said the thresholds were reasonable, noting that the rules are similar to those in Hong Kong.