Net profit and VIE structure, obstacles on the way to A-share listing



Mar. 8 (NBD) - The listing committee under the China Securities Regulatory Commission has beefed up its efforts to ensure quality companies get listed, giving as many as a dozen feedbacks to a company which submits the IPO application.

Foxconn's fast IPO review procedure raised the speculation that a fast-track channel may be set up for unicorns.

According to Choice, a financial data platform, 61 companies have filed for IPO from Jan 1 to Mar 5 this year. However, only 25 of them (40.98 percent) have been approved, indicating that only companies with great performance can be allowed to get listed.

Another fact is, the A-share market started to favor companies with new economic models and technologies since last year.

In 2017, the top 10 companies in terms of money raised via IPO are from sectors like computing, communications, pharmacy, software and information technology.

Industry insiders told NBD that in average companies have to wait for 1 year between application and listing. However, the time can be shortened to 9 to 10 months for unicorns in those aforementioned sectors. For instance, Foxconn Industrial Internet Co., only takes no more than two months to finish its IPO approval.

The changes in IPO also reflect the changes in China's economic structure.

According to a updated research report of the investment bank China International Capital Corporation, the market capital of listed new economy firms took up 44 percent of the total of all A-share, H-share and U.S. listed Chinese companies, much high than the figure of 24 percent in 2008.

It's noticed that some securities traders have attaches importance to firms in biotechnology, high-end manufacturing, cloud computing and artificial intelligence (AI).

A person-in-charge at Sinolink Securities told NBD that it has served companies in biotech and high-end manufacturing, and will make more efforts to serve those in cloud computing and AI.

The person also noted to facilitate faster IPO of companies in such sectors, some problems need to be fixed first.

Firstly, according to the Securities Law of China, net profit of companies to be listed on the A-share mainboard has to surpass 30 million yuan (4.7 million U.S. dollars) for 3 consecutive years. However, it's difficult for many internet companies to meet such standards in their earlier development.

Secondly, the corporation law stipulates that share of the same class must have same right and benefit. But there exist same shares with different rights in the equity structure of some companies. 

Last but not the least, under the current IPO review standards, it's hard for companies to be listed on the A-share market if they don't dismantle the VIE structure. A variable interest entity (VIE) is a legal entity in which an investor holds a controlling interest despite not having a majority of its share ownership.