Private equity asks for timely definition of legal status and proper supervision, Vice President Xu Ming of the Shanghai Stock Exchange said on May 13 at the "2011 Forum on Equity Investment in China" hosted by Shanghai Securities News.
In Xu's opinion, the standardized operation and healthy development of private equity requires effective legal support and proper external supervision. Overall, there has been no legal system or supervision mechanism applicable to private equity, and the construction of relevant supportive systems is lagging behind. Therefore, the Fund Law, which is undergoing amendment at present, must keep pace with the times and include private equity into its scope.
"What we need to think about is how to design a supportive system which is beneficial to the long-lasting innovation and healthy growth of private equity. And it definitely asks for ongoing contribution of all market participants." Xu said that the Fund Law should take private equity fund's particularity into consideration and adopt flexible supervision. Over-the-top generosity and regulation are both undesired. After being included into the scope of the Fund Law, the supervision mode of private equity fund should not copy from that of public fund or privately offered securities fund. All in all, after defining the legal status of private equity fund in the Fund Law, an appropriate external supervision is necessary.
Despite its rapid growth in China, private equity is facing some problems and challenges. Xu classified them into four aspects. First of all, the private equity still lacks standardization, and sees such phenomena as excessive competition, performance beautification in the process of corporate restructuring for listing, performance decline after listing, and "corruption" in investments. Secondly, the value creation function has not been given full play due to the immature pricing mechanism of stock market and the investment concentration on Pre-IPO link. In the third place, as the undeveloped merger, acquisition and reorganization market limits the diversified investments, private equity heavily relies on IPO for investment withdrawal. Finally, the lack of a standardized OTC market results in the over-reliance on centralized market in the process of investment withdrawal.
As to the future climate for development of private equity, Xu stressed that it is a systematic project to create an eco-environment suitable for sustainable and sound growth of private equity in the backdrop of building up a multi-layer capital market. Under the current circumstance, the following three measures are of great significance. Firstly, to diversify the investment scope of private equity, priorities should be given to the functions of private equity such as promoting equity financing, improving corporate governance, enhancing corporate competitiveness, and boosting business growth, and the lifting of government barriers for private equity's entry in enterprises of different industries, fields, sizes and development stages. In the second place, market selection and withdraw mechanisms should be optimized by perfecting stock issuance system and reinforcing delisting mechanism of listed companies in line with the law of the market and building the board switch system among different layers of markets and improving the pricing efficiency on issuance and secondary markets for a real survival-of-the-fittest market selection mechanism. Finally, the investment eco-climate of private equity should be optimized by improving the market credibility system, cultivating rational and healthy equity investment culture, reinforcing private equity's self-discipline, risk and legal awareness, and enhancing various service systems.
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Shanghai Stock Exchange's Vice President Xu Ming: Quicken Definition of Legal Status of Private Equity
Date 17/05/2011