Delisting reform to rein in company behavior

China is intensifying its efforts to enhance delisting standards, diversify exit channels and strengthen regulatory oversight, as part of the country's ongoing reforms to improve the efficiency and vitality of its A-share market.

As the reform of the delisting system enters a new phase, companies not meeting the required standards will be promptly removed from the market to the extent possible, which will enhance the overall quality of listed companies and improve the market ecosystem, experts said.

Moreover, a rigorous crackdown on various forms of delisting evasion will be pushed ahead, to provide greater protection for the legitimate rights and interests of investors and to bolster market confidence, they added.

The China Securities Regulatory Commission, the country's top securities watchdog, rolled out a raft of policy measures to strengthen regulation on delisting in mid-April, aiming to create a market environment that rewards quality and fosters sustainable growth.

Any company failing to meet the required standards may face delisting, regardless of the total number of companies affected, said Guo Ruiming, head of the commission's listed company supervision department, stressing that the number of delistings will not be predetermined.

The delisting system, along with the listing system, constitutes a fundamental pillar of the capital market, forming an integral part of its ecosystem. The presence of both entry and exit mechanisms contributes to a more dynamic and vibrant market environment, said Zhao Wei, an analyst at Founder Securities.

Since the implementation of the delisting system reform in 2020, according to data from market tracker Wind Info, a total of 146 companies have been delisted from the A-share market. The majority of these delistings were enforced by regulatory authorities.

In 2022 and 2023, 41 and 43 companies, respectively, were forcibly delisted. This represents a significant increase compared to the 17 companies delisted in 2021. As of April 19, this year has already witnessed the delisting of seven stocks, indicating the accelerated pace of delistings.

In a bid to strengthen market integrity and deter fraudulent activities, regulatory authorities have unveiled steps to expand the scope of major violations that warrant mandatory delisting, specifically targeting cases of severe and prolonged financial fraud.

Authorities have lowered thresholds for triggering delisting, including reducing the time frame, amounts and percentages associated with fraudulent activities. The reform seeks to effectively deter and contain the prevalence of financial fraud in the market, said Guo from the commission.

According to calculations by the commission, it's estimated that around 30 companies on the Shanghai and Shenzhen stock exchanges will be delisted by next year. Approximately another 100 companies are also at risk of facing a delisting if they don't improve their operations and enhance their overall quality in the next year and a half.

The enhanced delisting system will act as a catalyst for companies to proactively improve their governance structures and enhance their operational performance. The pressure to meet higher standards will encourage listed firms to prioritize the implementation of robust internal controls, transparent reporting mechanisms and effective risk management practices, said Fu Lichun, founding partner of Beijing-based YTI Capital.

To maintain their listing status, companies will be incentivized to improve their revenue growth, profitability and operational efficiency. This will ultimately contribute to the overall improvement in the quality of listed companies and foster a healthier market ecosystem, Fu added.

As the capital market undergoes rapid transformation, ensuring investor protection has become increasingly crucial.

Efforts will be made to establish a comprehensive system of administrative, criminal and civil remedies to hold wrongdoers accountable, and measures will be taken to provide compensation to investors affected by delistings, Guo said.

Various tools, including representative actions, advance compensation and professional mediation, will be utilized to safeguard the legitimate rights and interests of investors, he added.