September 5, 2008 / 5:57 AM / 11 years ago

China eases IPO exit rules for private capital funds

SHANGHAI, Sept 5 (Reuters) - China’s two national stock exchanges will make it easier for shareholders to exit their investments after a company lists its shares, addressing a common complaint by foreign private capital funds.

Investors buying into a company via a private placement within 12 months before it posts an IPO prospectus will be allowed to sell their shares one year after the company’s listing, the Shanghai Stock Exchange and the smaller Shenzhen Stock Exchange said in separate statements on Friday.

The new rules will be effective from Oct. 1, the bourses said. Previously the lock-up period was 36 months.

“It’s certainly a piece of good news for private equity and venture capital funds who have been complaining about the difficulties in quitting their investments in China,” said a portfolio manager with a European investment firm in Shanghai.

“Private equity funds are not charity associations. We help you to grow and also want to share your profits,” he added.

He declined to be named due to the sensitive nature of the regulatory environment in China.

However, in postings on popular Chinese online stock forums such as Eastmoney.com, many individual investors complained that the changes may further hurt market sentiment and encourage venture funds to invest in IPO-ready companies for speculative purposes.

The benchmark Shanghai Composite Index .SSEC has fallen more than 60 percent from its record peak last October and is down over 50 percent so far this year, making it the world's worst performer.

MORE ATTRACTIVE?

Global private equity funds such as Carlyle Group [CYL.UL] and Goldman Sachs (GS.N) have been rapidly expanding their investments in China, to tap the country’s double-digit economic growth and to diversify their holdings as the U.S. economy reels from a credit crunch.

Many Western firms have complained, however, that the going is especially tough in China, where private equity-owned companies face difficulties securing government approval for a public listing on the domestic stock markets, eliminating a key avenue used in other countries to exit investments.

Even if a company in their portfolio wins approval from the China Securities Regulatory Commission for a listing, private capital investors have still been required to hold onto their investments for at least three years.

China has at times been at odds with private equity firms, thwarting moves by foreign investors especially if they have vied for stakes in industries deemed strategically sensitive.

But Beijing has pledged this year to attract foreign venture capital funds and to develop local currency-denominated private equity funds to reduce Chinese companies’ dependence on bank financing.

The government is also planning a Nasdaq-style market at the Shenzhen Stock Exchange to attract qualified start-up companies, including high-tech firms that are already popular with global venture capital funds.

Full texts of the new IPO rules were posted on Friday on the websites of the Shanghai Stock Exchange (www.sse.com.cn) and the Shenzhen Stock Exchange (www.szse.cn). (Editing by Edmund Klamann)

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