The Shanghai Stock Exchange released a draft proposal to improve its delisting system on April 29. On the same day, the Shenzhen Stock Exchange, the smaller of the two stock exchanges in China, also released a draft amendment of rules on delisting companies from its main board and the board for small and medium-sized enterprises (SMEs).
The release of the delisting guidelines is beyond expectations despite a history of appeals. Some listed companies are now in peril of being removed from the two stock exchanges, according to International Finance News.
According to Xinhua, only 75 companies have been delisted since 2001, including 49 firms that have been in the red for several years running, which account for only 3.1 percent of the total. In the United States, about 8 percent of companies are delisted from the NASDAQ each year and 6 percent are delisted from the New York Stock Exchange. The proportion in the London Stock Exchange's Alternative Investments Market (AIM), an international market for small growing companies, is even higher, at 12 percent.
The draft proposal of the Shanghai bourse added six delisting criteria. Under the new criteria, a company will be delisted if its annual average net assets have been negative for the last two years, its annual average revenue has been lower than 10 million yuan ($1.59 million) for the last four years, or its share prices have been lower than their par value for 30 consecutive trading days.
The Shenzhen bourse also has similar requirements. One specific requirement for companies listed on the SME board is a company having received three public censures from the exchange over the last 36 months will be delisted.
"The new delisting system has improved a lot compared with the previous one," Li Daxiao, Director of Yingda Securities Research Institute, told International Finance News. "On one hand, it has added criteria for suspension or termination of the listing, made clearer requirements for re-listing, and completed the delisting procedure. On the other hand, it has put forward a series of measures to protect the interests of investors," Li said.
"The new policy will help increase investment functions, reduce speculation, and force under-performing stocks to return to their real values," Li said.
Despite the strict new delisting guidelines, experts said two more items should be added: Those with accounting violations must be delisted unconditionally, and big shareholders must compensate small ones.
Cause for alarm
Statistics from Wind Information, a Shanghai-based financial data firm, show there are 34 companies receiving "special treatment" whose net asset values per share have been negative for two consecutive years, including eight companies under suspension. That means once the new delisting system takes effect, the remaining 26 companies will be delisted by the end of this year.
After the new policy takes effect, the delisting of those "special treatment" companies will be accelerated. "Investors accustomed to investing in 'special treatment' stocks should tell right from wrong and seek opportunities to retreat, so as not to take bigger losses," said Shen Hang, an investment advisor at China Minzu Securities.
"Special treatment" stocks refer to shares in companies that have failed to earn profits for two consecutive years, or have been reported for false accounting, yet are still listed in the exchanges. Featuring capacities for sharp gains, they have often been favored by speculative investors.
"The new policy can also restrain investments in shell companies with the worst performance," said Huang Ming, a professor at the China-Europe International Business School.
In this way, capital in the stock market can flow to better-performing companies. Thus, the efficiency of resources allocation in the market can be improved and the capital market can promote industrial upgrading and serve the real economy.
