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ChiNext delisting policies ramp up risk for investors

By Zhou Junsheng (Global Times)

08:22, April 25, 2012

Last Friday, the Shenzhen Stock Exchange (SSE) announced in a statement that poorly performing companies trading on the ChiNext board will be subject to new delisting rules effective May 1.

Many experts saw these new policies as a move to attract more investors to the ChiNext board, where under-performing companies have largely failed to impress private capital holders. However, without a greater emphasis on accountability, these polices will either be ineffective or hurt the long-term development of China's stock market.

Perhaps the most glaring problem with these new policies is their failure to make clear who will bear the financial responsibility for a company's delisting, and the penalties that will be imposed upon them. Without more clarity, the losses resulting from the slashed market value of a company's stock after it is barred from trading on the board will fall directly on its shareholders.

It is unfair to expect shareholders, especially individual investors, to pay for the failure of a delisted company. They are not responsible if a company fails to perform well and they cannot share in the profits a company earns in the listing process. According to the basic principle that investors' obligations should be equal to their rights, they should not be forced to bear the bulk of the financial losses of a delisted company.

If shareholders are made to suffer because of the weak performance of a company, this will increase investors' risks and lower their incentives to put money into the ChiNext board, a scenario that may threaten the growth of China's stock market as a whole. Actually, the ChiNext Index dropped 56.72 percent during the two month period following the issuance of a draft outlining the new delisting regulations in November, signaling a clear slump in investor sentiment even as regulators moved to get tough on companies trading on the board.

Rather than letting the financial burden fall on investors, regulators should make delisted companies and their listing sponsors responsible for the losses associated with a company's delisting. This would not only bolster investor confidence but also punish those who are really to blame for a stock's shoddy performance and prevent companies from raising easy cash in the stock market.

As far as I am concerned, there are two possible reasons why a company's stock price might see a sudden or prolonged decrease that would make it eligible for removal from the ChiNext: irresponsible management or the disclosure of misleading financial information ahead of trading. In the first case, the company itself should be held at fault and compelled to compensate investors for improperly managing their money.

In the second case, the listing company should be held accountable for investors' losses for failing to reveal accurate and honest financial data regarding the company whose stock it is underwriting.

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