STAR Exchange Sponsors Win Big With Uncommon Rule


China's regulators forced investment banks to buy stocks in the companies they took public.

When China started their own exchanges and began to take companies public within them an interesting rule was put into place. The Chinese regulators told the banks, known as sponsors, that they needed to buy between 2% and 5% of the shares they were bringing to market, up to a maximum of about $147 million, and then hold the equity for two years. The rule has worked so far as Chinese banks have made hundreds of millions of dollars in gains on STAR stocks since the market launched in July 2019.

Reports say Sponsors have invested nearly 3.5 billion yuan, the equivalent of about $519 million, in the STAR market’s 20 biggest initial public offerings and secondary listings. As of Tuesday’s close, those holdings had doubled in value to more than $1 billion. The overall totals will be much higher, since more than 180 companies are now listed on the STAR market, according to Shanghai Stock Exchange data.

The STAR board has shaken up China’s capital markets in other ways, dispensing with practices used elsewhere such as unwritten caps on valuation, limits on first-day market moves and rationing of IPOs by regulators.

Bi Mingjian, then the chief executive of investment bank China International Capital Corp. , told a public forum in November the rule was unique to China and “goes against market principles”.

CICC has sponsored five of the 20 top deals, investing $207 million with a current value of $440 million. CICC reported an equity-investment gain of 1.5 billion yuan, equivalent to about $222 million, for the first half of this year and said much of this came from STAR stocks.

In its half-year earnings report for 2020, Haitong Securities, a major sponsor, said it had co-invested in five STAR companies for around 280 million yuan. The current value of 1.39 billion yuan, the equivalent of $206 million, it said.

Lijun Sun, the co-head of global banking for UBS Securities, UBS Group AG’s Chinese securities subsidiary, said the rules were a challenge for most Western banks, because they lock up capital and create conflicts of interest by making a bank act as both seller and buyer. Mr. Sun said Chinese and Western banks were still urging regulators to loosen the co-investment rules. To date UBS Securities is the only foreign player to act as a sponsor for a STAR listing to date. In that case, the securities regulator let the parent company, UBS Group, make the investment so the deal didn’t reduce the mainland unit’s capital, Mr. Sun said.

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Economics, Finance and Investing