Backdoor listings under scrutiny

An investor at a brokerage in Hangzhou, capital of Zhejiang province. The benchmark Shanghai Composite Index declined 2.8 percent to a seven-week low, closing at 2,913.25 points on May 6, 2016. [Long Wei/China Daily]

The road for the overseas-listed Chinese companies to return to the domestic A-share market could get bumpier, after the securities watchdog said it was putting closer scrutiny on backdoor listings to curb feverish speculation and possible market malpractice.

The China Securities Regulatory Commission said on Friday it is studying the potential impact of the re-listing of overseas-listed Chinese companies on the A-share market.

"The obvious price gap between overseas and home markets as well as speculation on listed shell companies deserve serious attention by the regulator," said Zhang Xiaojun, a CSRC spokesman.

An increasing number of overseas-listed Chinese companies have been seeking privatization and relisting on the domestic stock market, lured by much higher valuations offered by domestic investors.

A typical way for these companies to be re-listed at home is through a backdoor listing, also known as a reverse merger, where they take control of already listed shell companies.

Such practice has been considered an appealing short cut, given more that 700 companies are lining up to seek regulatory approval for their IPOs.

Speculation on shell-company stocks, the potential targets for reverse mergers, intensified after the regulator delayed the adoption of a much faster registration-based new share system.

There has also been a suggestion that the Shanghai Stock Exchange might delay the launch of a new board for strategic emerging industries, which is believed to serve as a listing destination for US-listed Chinese technology firms.

The latest wariness toward backdoor listings sent share prices of shell companies down on Friday.

The benchmark Shanghai Composite Index declined 2.8 percent to a seven-week low, closing at 2,913.25, while the Shenzhen Component Index dropped 3.6 percent to 10,100.54.

Share prices of US-listed Chinese companies also tumbled on Thursday after rumors circulated that the CSRC would halt the re-listing of overseas-listed Chinese companies in the A-share market.

Momo Inc, a Chinese social-networking app, which has already announced privatization plans, saw its share price plunge as much as 15 percent during intraday trading on the Nasdaq. Its share price closed down by 5.41 percent.