Companies must think twice before planning IPOs / floats in overseas bourses, experts warn

The numbers are staggering for any Chinese CEO hoping to take his company public: More than 800 companies are on waitlists to secure initial public offerings in the nation's stock markets.

Last year, there was a 43.5 percent decline (from the previous year) in the number of Chinese companies that went public and a 57.2 percent drop in the amount of funds raised.

Those are not very promising prospects. That is, unless you're a CEO looking abroad.

As of Jan 1, the China Securities Regulatory Commission enacted new guidelines to lower the barrier on companies interested in an overseas listing. In effect, it stripped away the regulations that required Chinese companies applying for an overseas IPO must have at least 400 million yuan ($64 million; 48 million euros) in net assets and that they must raise $50 million (37 million euros) or more as well as generate a minimum of 60 million yuan in annual profits.

Zhang Qi, a financial analyst at Zero2IPO Research Center, says that "the new rules will help ease the pressure on China's A-share markets and (Chinese companies interested in going public) can raise funds from overseas markets to develop their businesses".

The timing of the lowered threshold couldn't be more right for China. The mainland's stock markets are heading into a third year of decline and smaller companies are in dire need of financing. The new guidelines should allow easier overseas listings for the nation's small, private businesses, who now only have to meet the standards of the market in which they want to sell shares.

But before the guidelines were passed, several small and medium-sized companies from China had already found a way to go public on overseas stock markets through the so-called red chip structure. The process is simple: Companies first establish an offshore holding company, which then acquires control over the operating company in China; when the holding company secures its IPO, it no longer needs CSRC's approval.

With the regulation change, Chinese SMEs can still go public overseas through the red-chip structure. This has led many industry insiders to believe the new regulation will have little impact on Chinese IPOs in overseas markets, though they point out that the new rules reflect a new CSRC attitude, akin to an encouraging message for Chinese SMEs listing overseas.

"The new regulation reflects a more open minded attitude of the CSRC. It allows Chinese companies more opportunities to choose a suitable overseas market for IPO rather than being prevented from getting to that point by domestic rules," says Amanda Yao, a senior associate at international law firm Pinsent Masons LLP.

But Yao clarifies that "the new regulation applies directly to a listed company incorporated in China, which is traditionally more popular for State-owned companies' listings in Hong Kong.

"But most individually owned SMEs may still prefer to list overseas through the red chip structure," she says. "This is because overseas investors may feel more comfortable investing in a listed company set up in a jurisdiction they are more familiar with."

Matt Butlin, head of equities at Allenby Capital, is a bit cautious about Chinese companies looking overseas. Butlin is an adviser and broker on the Alternative Investment Market, the London Stock Exchange's market for small cap companies that was launched in 1995.

About 40 Chinese companies are currently listed on AIM, which has no profit or market cap requirements for IPO candidates.

He says London advisers know there is a limited investor appetite for small Chinese companies.

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