In May 2004, with the approval of the State Council, the China Securities Regulatory Commission (CSRC) officially approved the establishment of a new small- to medium-enterprise board (SME Board) as a special market section within the Shenzhen stock exchange (SZ Main Board), and one that has an independent trading system. The move is a significant step forward for the exchange.
The goal is to introduce a new financing platform for small-and medium-enterprises (SMEs) without lowering the listing requirements and to help those high-technology SMEs with growth prospects, to have a listing on the Shenzhen Stock Exchange. The SME Board distinguishes the stock market for small-and medium-sized businesses from that for the large, State-owned companies.
Characteristics of the SME Board of the Shenzhen Stock Exchange
The laws, regulations and IPO eligibility criteria governing the SZ Main Board will remain applicable to the SME Board. The SME Board has been established to work within the SZ Main Board but with an independent trading system, regulatory system, stock coding and stock price indices - a place where small- and medium-growth enterprises, satisfying the listing conditions of the SZ Main Board, are exclusively traded.
Instead of launching an independent second board, as previously planned, the SME Board will apply the existing rules and threshold of the Main Board.
The SME Board will be a subordinate board to the Main Board. It is intended that it will eventually become an independent market in its own right.
Comparison of the SME Board with the Growth Enterprise Market (GEM)
Hong Kong started a GEM board for growth companies, big and small, and engaged in any industry, in 2000. The GEM, which was modelled on the US NASDAQ market, is designed to help growth enterprises, particularly those emerging enterprises, that have good business ideas and growth potential but may not always be able to take advantage of the fund-raising opportunities available on the main board of the Stock Exchange of Hong Kong (HK Main Board).
It is because a great number of these enterprises do not fulfil the profitability/track record requirements of the HK Main Board that they have instead found a listing on the GEM. The following paragraphs compare the main features of the GEM and SME Board.
Listing criteria
The SME Board is a subordinate of the SZ Main Board. Listed companies on the SME Board have to abide by the SZ Main Board listing rules. The GEM Board, however, has a different set of listing requirements, as contained in the Rules Governing the Listing of Securities on the Growth Enterprise Market (the GEM Listing Rules), to the HK Main Board Listing Rules.
In particular, in recognition of the fact that promising growth enterprises may not always have achieved a past profit record, the GEM Listing Rules do not impose a profit requirement on listing applicants. Other significant characteristics include the requirement that list applicants only need to demonstrate at least two years of business operation immediately preceding the date of submission.
The period of operation may be reduced to a year if certain criteria are met. Also, a new applicant must have at least 100 public shareholders at the time of listing. There must be a minimum of 300 public shareholders at time of listing if the new applicant meets certain criteria which allows it to have only one year of business operation.
In contrast, for a company to be listed on the SME Board, the SZ Main Board requirements need to be fulfilled. Firstly, the shares need to be approved by CSRC and relevant departments. Secondly, the SME's share capital cannot be less than 50 million yuan (US$6 million). Thirdly, the SME is required to be in business for more than three years and to have generated a profit in the previous three consecutive years.
In addition, there should be more than 1,000 shareholders holding more than 1,000 yuan (US$120) worth of shares. Also, the company is required to issue more than 25 per cent of its total shares to the public. The threshold of shares being held by the public is reduced to 15 per cent for a company that has capital of more than 400 million yuan (US$43.6 million). Last but not least, the company should not be in violation of any laws or guilty of any false disclosures of information in the previous three years.
Structure
The SME Board is a segment of the SZ Main Board. It keeps and is governed by the existing laws, regulations and IPO eligibility criteria that govern the main board. Other laws and regulations promulgated by CSRC and other relevant departments of the State Council will also be applicable to the SME Board.
The GEM, on the other hand, is a completely separate market from the HK Main Board. The Board of the Stock Exchange of Hong Kong has arranged for all of its powers and functions, in respect of all listing matters related to GEM, to be discharged by the GEM Listing Committee and/or its delegates, subject to the review procedures set out in the GEM Listing Rules.
Regulatory system
With regard to regulatory systems, both the GEM and SME Board have either separate or additional regulations to their respective main boards. For example, in order to improve and strengthen market regulation and effectively guard against potential market risks, the Shenzhen Stock Exchange has taken into account the characteristics of the small- and medium-sized enterprises and formulated a number of specific provisions, including the Special Provisions on Trading in the SME Board, the Special Provisions Governing Listing on the SME Board, and the Agreement on Listing on Small and Medium Enterprises Board. Similarly, the GEM has a separate GEM Listing Rules which lists out all the listing requirements for the GEM. Both groups of provisions and rules are independent from the rules regulating the main boards.
Information disclosure
Both the GEM and SME Board have additional information disclosure requirements to those of their respective main boards.
According to the requirements stipulated in the Special Provisions Governing Listed Companies on the SME Board, listed SMEs are:
1. required to establish an internal control system to strengthen control and curb violations;
2. required to disclose the status of their management of investor relations on a regular basis, as well as improve the quality of disclosure;
3. required to hold annual meetings, where statements of reports are made, in order to strengthen management of investor relations, and
4. required to conduct regular examinations of raised funds to prevent a company from deviating from its agreed investment strategy.
In contrast, the GEM Listing Rules require listing applicants to disclose, in detail, their past business histories and future business plans. After a listing has been obtained, the listed companies are required to make half-yearly comparisons of their progress with their submitted business plans for the first two financial years and publish quarterly accounts in addition to half-yearly and annual accounts. In addition, a shorter period is granted to make this information available to the public.
Targeted companies
The SME Board is open to a wide range of industries, however priority is given to SMEs that have well-defined core businesses, high growth and a greater proportion of high-tech operations. The GEM is also open to growth companies, but they can be big or small, and in any sector.
Technology companies in particular should find it attractive to align themselves with the strong growth themes of either market. Both the GEM and SME Board have independent stock coding and stock price indices and operate under independent trading systems.
Conclusion
The SME Board is similar to the GEM in that its purpose is the same - that of providing an alternative avenue for growth enterprises to explore fund-raising opportunities. However, it differs in fundamental areas such as the relationship with its related main board and information disclosure.
* Disclaimer
The information in this article, by the mentioned authors, is written in general terms and does not constitute any representation or opinion of the writers and/or Deloitte Touche Tohmatsu. It is intended as a guide only and the application of any of this article's contents to specific situations will depend on the particular circumstances involved and accordingly it cannot be relied upon as a substitute for professional advice.
* David Keung is partner and Jamie Mak, manager, of Deloitte Touche Tohmatsu
(HK Edition 12/06/2004 page18)
