CCID Consulting: China’s New Third Board Expansion Nears, Board Shift Will Take More Time

Like the extraordinary rise of GEM (Growth Enterprise Market) in China’s capital market in 2009, New Third Board (a new agency share transfer system) is going to make a hit this year. With the advancement of the pilot project and the market maker system reforms, China’s New Third Board is emerging as an important platform for direct financing in addition to the existing Main Board, SME Board and GEM Board.

• With favorable policies, New Third Board will soon see an expansion

In 2010, working out the plan for expansion of pilot agency share transfer system projects and speeding up the development of the over-the-counter market was one of the seven priorities of China’s securities and futures regulation authorities. In 2011, accelerating the development of a multi-level capital market system to promote direct financing and expanding the scope of the Zhongguancun pilot project to build a nationwide over-the-counter trading market is taken as the top priority of the eight key tasks for securities and futures regulation. According to CCID Consulting, following the establishment of GEM and the release of Stock Index Futures and margin trading, the development of over-the-counter market and the expansion of New Third Board have become a must in China.

Loosening limit on registration location for companies to be listed on New Third Board. So far, New Third Board-registered enterprises are limited to those in Zhongguancun National Independent Innovation Demonstration Zone. Among a total of 125 companies in the New Third Board pilot project, 81 was listed, and the current number is 78 following the listing of Join-Cheer Software on SME Board and BeiLu Pharmaceutical and Century Real on GEM Board, much smaller than that of Main Board and GEM Board. In order to develop China's over-the-counter market and expand the size of New Third Board, it will be necessary to loosen the limit on the registration location of the listed companies. China’s 83 state-level high and new technology industrial development zones, covering various fields including electronic information, optical, mechanical and electronic integration, new materials, biotechnology, new sources of energy and environmental protection, are seeing an overall rising profitability. As such, it will be desirable that New Third Board moves to include companies in other state-level high and new technology zones.

Lowering standards for companies to be listed on New Third Board. The fundamental requirements for listings on New Third Board include valid existence for two years, prominent main business, sustainable profitability, reasonable corporate governance, standard operation, legal compliance of share issuance and transfer, and a certificate of share transfer pilot company granted by Beijing Municipal Government. The relatively strict listing standards have been blocking many companies from entering New Third Board, which closes a direct financing channel for those companies and leads to a vicious circle between the companies and the capital market. Therefore, lowering the standards and increasing the number of listed companies will be key for the successful expansion of New Third Board.

Lowering threshold for investors on New Third Board. Considering that New Third Board features higher risks as compared with Main Board and GEM Board, New Third Board investors are required to have the corresponding risk identification and tolerance abilities, thus New Third Board investors are mostly institutional investors, while individual investors are strictly restricted. In this case, New Third Board becomes a minority investment market. As the New Third Board pilot project extends to other high and new technology zones, the number of listed companies will increase, and the enlarged trading size will require a larger group of investors. Therefore, attracting more small institutional investors and capable individual investors will be another key task in the process of the New Third Board expansion.

• Board shift will take more time

Board shift hereafter refers to shifting a third board-listed company that is qualified for accessing a higher level of the capital market on one of the boards in China’s stock market. So far, two third market-listed companies have been listed on GEM Board and Main Board respectively through an IPO instead of a board transfer.

In the case of board transfer, a New Third Board-listed company that has met the standards of the Main Board or GEM Board can apply for direct listing on one of the boards without an IPO, which is quite similar to the shift from OTCBB to one of the markets under NASDAQ in the United States. However, CCID Consulting believes that there is still a long way to go before board transfer can be well carried out in China.

Transition from the authorization mechanism to the registration mechanism. In the United States, the registration mechanism is adopted for company listing. OTCBB-listed companies can be shifted to other boards without examination and approval of the Securities and Exchange Commission. However, under the authorization mechanism in China, China Securities Regulatory Commission would verify whether a company has reached the listing standards, whether the company is of fine quality, whether the fund-raising is in line with the state’s development strategies and whether the company has a promising long-term potential. Therefore, the removal of the authorization mechanism will be required to create a "green channel” to Main Board and GEM Board.

Relaxation of restrictions on the number of shareholders. According to China's Securities Law, a securities issuance to nonspecific objects or more than 200 specific objects is counted as a public issuance. As a New Third Board-listed company is a non-public company in China, its number of shareholders cannot exceed 200 in the process of board shift, which is a major technical obstacle that should be removed.

Improvement of the capital market. Currently, problems abound in China’s stock market: the IPO prices and PE ratios are staying high on the GEM and SME boards; securities traders can simultaneously serve as sponsors, underwriters, financial advisors and shareholders and therefore participate in the IPO of companies in which their directly invested companies hold shares, resulting in unexpected share purchases and PE corruptions. Board transfer of New Third Board-listed companies may further impact the ill-regulated Main Board and GEM Board and give rise to more problems.

About CCID Consulting Co., Ltd.

CCID Consulting Co., Ltd. (hereinafter known as CCID Consulting), the first Chinese consulting firm listed in the Growth Enterprise Market (GEM) of the Stock Exchange of Hong Kong (HKSE: 08235) and the first consulting firm which gets ISO 9001 international and national quality management system standard certification, is directly affiliated to China Center for Information Industry Development (hereinafter known as CCID Group). Headquartered in Beijing, CCID Consulting has so far set up branch offices in Shanghai, Guangzhou, Shenzhen, Wuhan and Chengdu with over 300 professional consultants after many years of development. The company’s business scope has covered over 200 large and medium-sized cities in China. With its powerful industrial resources, information technology and data channels, CCID Consulting provides customers with public policy establishment, industry competitiveness upgrade, development strategy and planning, marketing strategy and research, HR management, IT programming and management services. The company's customers range from industrial users in electronics, telecommunications, energy, finance and automobile to government departments at all levels and diversified industrial parks. CCID Consulting commits itself to becoming China's No.1 advisor for enterprise management, No.1 consultancy for government decision and No.1 brand for informationization consulting.