context: Previous pilots to test share transfers were set up in Beijing and Shanghai in 2020. The mechanism allows more flexibility for investors but has been seldom used, due to regulatory requirements creating a difficult process.
To improve the non-cash distribution mechanism of private equity funds and venture capital funds, CSRC (China Securities Regulatory Commission) is launching a pilot program for venture capital funds to distribute stocks in kind to investors. Details specify
- private equity and venture capital funds must distribute to investors the shares held by the listed company before the IPO
- those holding shares of a listed firm that involves pledges, freezing, judicial auction or violates regulations cannot participate in the pilot program
- shares cannot be distributed if the investor is
- actual controller, controlling shareholder or the largest shareholder of the listed company
- director, supervisor or senior manager
- not qualified for securities market investment
- 'Special provisions on venture capital fund shareholders reducing holdings in listed company' are applicable
The duration of a private equity fund normally ranges from five to 10 years as it usually takes several years for projects to go public, creating a strong demand for exits, reports Caixin. If these are sold directly, there will be a lot of pressure on the secondary market. With share distributions, PE funds can avoid selling a listed company’s shares and putting downward pressure on the stock market, while investors who favour the company have an additional way to acquire the shares.