Number of delisted companies surges

Writer: Yang Yang  |  Editor: Zhang Chanwen  |  From: Shenzhen Daily  |  Updated: 2022-06-07

The number of listed companies booted off China’s two stock exchanges has increased sharply this year as regulators step up efforts to improve the quality of listed companies and discourage speculative trading.

The Shenzhen Stock Exchange said Thursday that it decided to terminate the listing of three companies — Julong Co., Boomsense Technology Co. and Lead Eastern Investment Co. The three are kicked off the exchange for failing to issue the annual financial report on time or being issued the “disclaimer of opinion” on the financial statements by their auditors, the Shenzhen bourse said.

The Shenzhen exchange’s move came a day after the Shanghai Stock Exchange announced the delisting of Shandong Jintai Group Co. and Xinjiang Ready Health Industry Co.

According to data issued by the Shanghai and Shenzhen exchanges, a total of 32 companies have been delisted since May 10, with 20 listed in Shenzhen and 12 on the Shanghai bourse.

China Merchants Securities Co. expects the number of companies expelled from domestic exchanges to jump to at least 42 this year, up sharply from 25 a year ago. As the number of delisted firms is expected to hit an all-time high, some call the year 2022 a “big year of delisting.”

China set up a delisting mechanism in 2014 but its delisting rate was just a fraction of its more developed counterparts.

Yan Qingmin, former vice chairman of the China Securities Regulatory Commission (CSRC), the country’s top securities regulator, once said that the annual delisting rate in China was a mere 0.36% between 2001 and 2018, compared with the U.S. market’s 4%.

Even compared with major Asian markets, the delisting numbers in China were relatively small. A total of 16 companies were forced to drop from South Korea’s Kospi and Kosdaq markets in 2020, said the Korea Exchange. The number was 15 for China, a market that is more than five times bigger.

One of the reasons for fewer delistings in China is mainly because listings are hard to come by. Even if a company is nearly bankrupt, the shell value of being listed is really high. Just by staying alive, it can find a buyer and speculative trading centering on weak listed companies’ turnaround stories is rife.

China has in recent years been pushing ahead with reforms on its approval-based initial public offering (IPO) system, under which the CSRC vets every application and approvals can take months or even years.

With the introduction of the more market-oriented registration-based IPO system, regulators ease the listing thresholds, paving the way for hundreds of new listings and reducing the value of a shell company as fewer companies are willing to choose reverse mergers to get listed.

Some analysts expect the registration-based IPO system to increase the number of delistings of companies with weak fundamentals, helping enhance the quality of listed firms.

This year’s record delistings also come after regulators pushed forward with capital market reforms by introducing a sweeping delisting reform a year and a half ago.

On the final day of 2020, the Shanghai and Shenzhen exchanges unveiled revised rules to weed out listed companies indulging in misconduct or with weak fundamentals in a bid to improve the overall quality of listed companies in the world’s second-largest stock market.

According to the revised rules, companies with share prices below 1 yuan (US$0.15) for 20 consecutive days now face automatic delisting. Those that fraudulently overstate their earnings by 100% for three years are on the chopping block, too.

The rules also stipulate that controlling shareholders, actual controllers, directors, supervisors and senior executives of firms that are delisted due to major violations of laws and regulations are banned from selling their shares after administrative penalty notices are issued or judicial rulings are announced.

Those tougher delisting rules are intended to keep the stock market healthy and protect small investors’ interests, said the two exchanges in statements.

There are a total of 4,830 listed companies on China’s A-share market, with about 300 to 500 companies getting listed each year.

Analysts say that the relatively low number of delisted companies in the domestic stock market is “abnormal” as delistings are a staple of healthy stock exchanges, a mechanism for clearing out the dross. Stringent delisting rules would help improve the quality of listed companies and thus bode well for the whole market, they say.