A Shares Spin Off Listing Rules Landing: The Profit Threshold Has Dropped Sharply, And Many Companies Plan To "Split Up".

In July 2004, the SFC issued the notice on regulating the listing of enterprises listed in China to overseas listing (hereinafter referred to as "Notice of overseas listing").

This policy defines the conditions that domestic listed companies should meet in order to facilitate the listing of overseas listed companies, and facilitate the development of domestic listed companies by means of overseas markets. The listed companies in China such as TCL group and CIMC have successfully split subsidiaries to overseas listing. However, the A share market is not mature enough, and the market is worried about domestic spin off.

15 years later, in December 13, 2019, the SFC issued a number of regulations on the pilot of the listing of subsidiaries of Listed Companies in a regular press conference (hereinafter referred to as the "separation pilot").

Nowadays, the domestic capital market has been accumulated for many years, and more and more listed companies have the demand for splitting and listing. And this year, the voice of breaking the ice policy is increasing. Regulators have repeatedly declared that they should promote the ice breaking policy.

At the same time, the A share market supervision mechanism and regulatory rules and measures on inter industry competition, related transactions, insider trading and other issues are becoming more and more perfect. The regulatory authorities have accumulated experience in supervising and managing the shareholding structure of "A holding A" from the follow-up supervision of mergers and acquisitions in recent years.

Sun Nianrui, deputy director of the securities and Futures Commission's listing department, also said at the press conference: "at the present stage, the SFC has launched the" mature conditions of the listed companies to split their subsidiaries listed in the domestic market ". This is an important measure for deepening the structural reform of the financial supply side in the A share market, which is conducive to better serve technological innovation and economic quality development, and help listed companies straighten out their business structure, broaden their financing channels and improve their incentive mechanism.

Four changes in the official version

When the draft of the "split pilot" was released in August this year, some market views held that the threshold of some core provisions was too high, and the number of enterprises that met the rules in the market was very small, and the effect that the policy release could not achieve could not be achieved. During the period of soliciting opinions, all parties in the market actively responded to the SFC's feedback documents, which were mainly focused on the "net profit" requirements of listed companies, whether the business or assets of fund-raising investment could be split, and the proportion of directors and executives shareholding.

After the release of the official version of the "split pilot" in December 13th, the reporters found that several amendments to the market were made at the time, and the SFC had made amendments.

The first is the most important threshold for profitability. In the draft, the SFC set a continuous profit for the last 3 accounting years of the listed company, and the net profit of the shareholders who belong to the listed company has accumulated no less than 1 billion yuan in the last 3 accounting years after deducting the net profit of the subsidiary company which is entitled to enjoy the rights and interests enjoyed by the listed company. In the official version, the cumulative standard of net profit is adjusted to no less than 600 million yuan in the absence of other requirements.

A person close to the regulatory level said that during the period of soliciting opinions, there was a voice in the market that the profit requirement of the original 1 billion yuan was too high, and some enterprises might be "out of the door". In the light of the development of capital market at present stage, the official draft should be lowered to 600 million yuan, so as to further play the role of the spin off tool and enhance the adaptability of the rules.

The second core change is loosening the requirements for the use of raised funds. The draft does not allow for the separate listing of business or assets that have been used for fund-raising within three years. In the official version, the statement on this requirement has been relaxed. The SFC allowed the subsidiary to split up the fund in the past three years, which does not exceed 10% of the subsidiary's net assets.

For this change, Sun Nianrui explained: "from the actual situation, the purpose of raising funds by listed companies is relatively large. Some projects or assets may only be used in small quantities to raise funds, which is also an objective need for the listed companies to cultivate their businesses. The complete prohibition of splitting is not conducive to the development of such businesses or assets."

The three is to relax the requirements of directors and executives of subsidiaries. The draft solicitation requires that directors and senior executives of listed companies and subsidiaries should have no more than 10% shares of subsidiaries. The official draft eased the shareholding restrictions of directors and executives of subsidiaries, from 10% to 30%, which met the increasingly common practice needs of company management team shareholding. However, the retention of shares held by directors and executives of listed companies was strictly restricted, so as to prevent possible conflicts of interest and transfer of interests.

Wang Jiyue, a senior investment bank observer, said: "the biggest significance of splitting the market is not to rebuild a shell. Rather, the listed company as an incubator, the incentives for the new business and the core team of the new board, the proportion of the draft, the incentive effect is obviously much worse than the policy expectations. I had previously proposed that there should be no restrictions on the executive shareholding of directors of a subsidiary company, so long as the corresponding procedures and pricing are reasonable, the interests of listed companies will not be damaged.

The last core revision focused on the competition of the same industry. Compared with the draft, the official release rules modified the expression of competition in the same industry to adapt to different plate arrangements. The revised statement is: "after splitting up, the mother and child listed companies conform to the regulatory requirements of their respective departments on inter industry competition and related transactions."

Reporters learned that, at present, the main board, gem and other market segments and the science and technology board competition on the industry's regulatory requirements are different, and the requirements of the science and technology board are relatively relaxed. In order to give consideration to the institutional arrangement of different plates, the rules promulgated by the government have made specific amendments to the specific expressions.

But at the press conference, Sun Nianrui pointed out that the amendment does not mean that the regulation is loosened. The listed companies must strictly abide by the independent regulatory requirements of the plate.

Finally, according to the "split pilot", the listed companies need to meet 7 thresholds if they want to split their subsidiaries in the mainland.

It is necessary to meet the continuous profit of the listed stock market for 3 years and the last 3 accounting years. In addition, the net profit of the shareholders who belong to the listed company in the last 3 accounting years will be accumulated not less than 600 million yuan (net profit is calculated before and after deducting the non recurring gains and losses). The net profit of the subsidiary shall be no more than 50% of the net profit of the listed company. At the same time, it is also required that the net profit of the listed subsidiary shall be no more than 50% of the net profit of the listed company. The net assets shall not exceed the 30% of the net assets of the listed company, and the listed company shall not spin off the listing of the financial business subsidiary.

Enterprises are eager to try.

According to the reporter's understanding, since the release of the rules for soliciting the draft, many companies have expressed their demands for splitting the listing of their subsidiaries publicly or semi publicly.

According to the rough statistics of the securities companies, as of now, 9 A share companies have made clear that they will split their subsidiaries on Ke Chuang Chuang.

For example, Shen Kang Jia A (000016.SZ), Donggang shares (002117.SZ) and the first flight energy efficiency (002665.SZ) in the announcement clearly indicate the intention to enter the science and create board; Lok medical (300003.SZ) and Shanghai electric (601727.SH) disclosed the plan to actively promote the division of the science and technology board in the earnings report. Other companies also convey their desire to spin off the market through interactive platforms and agencies.

The release of the pilot scheme and the release of a number of core thresholds will certainly stimulate more enterprises to make plans for splitting up and declare them one after another.

But in fact, according to the organization, there are only a handful of enterprises that can really meet the requirements of breaking up the conditions and finally complete the separation. According to statistics, the Hongkong market has completed more than 40 orders of spin off since 2011, and there are more than 80 separate cases in the US market in the three years of 2016-2018 years. Therefore, enterprises do not exclude the idea of "Li Gui" speculation or spin off.

In response to this, the SFC said at the conference site that for the problems of "hollowing out" of the parent company, interest transmission, related transactions, increasing competition in the same industry, and the two level market speculation, the "separation pilot" made a targeted arrangement to carry out a comprehensive chain supervision of the listed companies.

For example, when a listed company discloses the information link, the rules require disclosure of information in accordance with the provisions of major asset reorganization, and the exchange will conduct inquiries about the disclosure of the split information. If necessary, relevant departments will conduct on-site verification.

Secondly, when a subsidiary applies for issuance and listing, it needs to perform IP0 or reorganize its listing registration or audit procedures. Subsidiaries need to meet the requirements of IP0 or restructuring and listing, and fully disclose information.

In addition, in the long term mergers and acquisitions and daily supervision, the regulatory authorities have developed a mature regulatory mechanism, such as insider information registration system, stock trading verification, stock price monitoring, and so on. Similar regulatory measures will also be used in the supervision of spin off.

Sun Nianrui pointed out that the SFC will intensify its crackdown on false information disclosure, insider trading and manipulation of the market, especially in the case of splitting up and listing, and the illegal behavior such as "flickering".