Shell companies struggle to stay listed

China is planning to clamp down on back door listings. A back door listing, which is sometimes referred to as a reverse takeover, or reverse IPO, happens when a privately-held company that may not qualify for the public offering process buys a publicly-traded company.

This usually hints at significant weakness in the acquired company and is a warning sign for investors. That's why the par for such activities should be raised.

The Chinese securities regulator, the CSRC, has announced it will step up its crack down on back-door-listings in the country next year.

Cheap and poor performing stocks often stand higher chances to be bought. The biggest risk they face is that they are on the edge of delisting.

"The securities regulatory commission has been strict with applications of company restructuring, raising the bar as high as the standard for the IPOs. Investors taking stake in the acquired companies should be extra cautious as they may get delisted after three years of losses." Yang Delong, Chief Strategist, China Southern Fund Management said.

Some of these shell companies are selling their assets to stay afloat. But that's hardly a sustainable strategy.

"Shell companies are facing the year-end test for their annual performance. Some are selling their assets to improve their balance sheets. But this won't improve the companies' operation. What are they going to do next year, and the year after next?" Yang Delong said.

Some, in the meantime, adjust their accounting policies, in a bid to cut losses and sweeten up their bitter balance sheets.

"It's another way of staying listed as shell companies. But it doesn't change the fundamentals: their real profitability and corporate governance." Yang Delong said.

Chinese investors have been making bets on listed companies with poor performance that turned into shell firms for a backdoor listing. But this may only increase insider tradings in the market.