The China Securities Regulatory Commission (CSRC) has set up criteria for overseas listings of subsidiaries of domestically listed companies to protect interests of public shareholders.

Parent companies have a series of conditions to meet before they may spin off overseas subsidiaries. These include operating profitably for three consecutive years and separating funds raised in the domestic market over the past three fiscal years from the subsidiaries that intend to list overseas.

The regulations, released by the CSRC on Wednesday, will also include information disclosure requirements and liabilities of financial consultants during the listing process.

Their purpose is to protect the interests of the public shareholders in the domestic market and ensure that the parent firms can maintain sound operations after their subsidiaries are listed overseas, a CSRC spokesman said.

In the international markets, listed companies frequently spin off subsidiaries and list them abroad. In recent years, more domestic firms have sought such tools to meet new financing needs and build their positions in international markets, the spokesman said.

However, if the parent company transferred most of its core assets to the subsidiary, it would seriously erode its value to shareholders and affect the normal business operations of the company. Thus, many countries have implemented regulations to enhance supervision and protect the interests of shareholders.

The CSRC’s new rules will help curb irregularities and reassure domestic investors, said Yin Guohong, an analyst with China Securities. Normally, a public offering by a subsidiary would dilute the parent company’s shares, so standards and limits must be set.

For example, the new CSRC regulation limits the net profits of the subsidiary seeking an overseas listing to 50 percent of the overall profits of the listed parent. Also, the two must not be competitors in the same business and they have to maintain independence in assets and finance.

The parent company should also be free of irregularities for three years preceding the subsidiary’s listing.

Moreover, to avoid manipulation by affiliated companies or individuals, board members and senior managers of both the parent firm and the subsidiary should not hold more than a 10 percent stake in the subsidiary. Their holdings must be approved by at least half of the shareholders.

Yin said the new regulation might delay the plans of some parent companies. Those who fail to meet the profit record criteria, for example, may have to withdraw applications for subsidiaries’ overseas listings.

The Shenzhen-listed TCL group, one of China’s biggest consumer electronics producers, is adjusting its plan to spin off its mobile phone operation, a core business of the group, and list it in Hong Kong.

When the plan was announced a few months ago, shareholders were unhappy. Share prices declined and ultimately the group adjusted its listing plan. Earlier this month, the group announced that it would give up the IPO of its mobile subsidiary in Hong Kong and replace it with “recommendation” and then directly list the stock on the exchange.

(China Daily August 12, 2004)