INSTITUTIONAL CHANGE AND FUNCTIONAL EVOLUTION FOR CHINESE SECURITIES FIRMS—AN ANALYSIS WITH PARTICULAR INTEREST IN THE FUNCTION OF AN UNDERWRITER'S GOODWILL
The Impact of Securities Firms as Public Companies
Institutional change could help us understand the impact of flotation on the goodwill of securities firms.
The first Chinese securities firm, Shenzhen SEZ Securities Co., was established in 1987. Back then, in the general climate of a planned economy, protection policy and administrative monopoly imposed strict restrictions on market access and posed a huge impediment to the development of Chinese securities firms. Organizationally, all securities firms were solely owned by the government.
With the advance of commercial process and market-oriented reform of Chinese financial institutions, and after the enactment of the Companies Act of 1994 and Financial Institutions Regulations, securities firms started to regard a limited liability company as the first-choice organizational model for reorganization. Around 1997, some securities firms reorganized themselves as companies limited by shares for the purpose of increasing share capital.
After China acceded to the WTO in 2001, Chinese financial institutions faced increasing competitive pressure from foreign competitors. The economies of scale and scope were no longer the only competitive advantage. Securities firms began competing in capital and corporate governance structure. Chinese securities firms were largely less competitive as a result of sole ownership by the government. In 2006, regulators put forth the Risk Control Indicators-Based Regulatory Measures for Securities Firms and the Notice of Standard Computation of a Securities Firm's Net Capital, confirming net capital as the core risk control indicator. Thus, many securities firms chose to go public to approach more investors than they had in equity participation. They aimed to expand capital, meet net assets requirements, and improve corporate governance structure.
IPOs in China are subject to strict regulatory endorsement and profitability criteria. Therefore, securities firms face difficulty and uncertainty getting an IPO approved, since their performance is dependent on how the market is doing. Backdoor listing thus has become a popular choice, whereby securities firms may face less pressure with regard to financial criteria.
Recently, the CSRC attempted to regulate backdoor listing. It made a decision to modify provisions on major asset restructuring and related financing packages in listed companies. Although this decision does not apply to financial institutions for the time being, there seems to be increasing uncertainties for securities firms to take advantage of backdoor listing.
It is not difficult to find that institutional change has brought about self-improvement and self-growth of the Chinese securities firms. Because of strict regulatory endorsement and profitability criteria for IPOs, securities firms qualified for flotation are usually in better business conditions. This is also true in backdoor listing, in which a restructuring plan is also subject to the CSRC's examination and approval. As public companies, securities firms could further increase net assets and improve corporate governance structure, incentive mechanism, and business performance, thus helping better the services offered. Therefore, flotation can help securities firms enhance their reputation and help the cause of goodwill.