OTC equity market to be expanded nationwide

China's securities regulator issued a draft of measures over the weekend to expand the over-the-counter (OTC) e-quity market nationwide, as part of government efforts to offer more financing channels for cash-starved small high-tech firms.

The new draft measures for OTC market expansion include amended supervision and management rules for non-publicly listed firms and guidance for unlisted firms.

Public trading of shares in the qualified firms should be conducted at the National OTC market, also known as the National Equities Exchange and Quotations (NEEQ) system, and should no longer be restricted to operating only in local high-tech zones, according to a statement released by the China Securities Regulatory Commission (CSRC) on Friday.

The OTC market, which is also known as the New Third Board, was created in a trial program in Beijing in 2006. The aim was to help unlisted firms that do not meet listing requirements by allowing them to raise money through selling shares.

It was initially limited to firms re-gistered in the Beijing Zhongguancun Science Park, but was expanded to companies registered in high-tech zones in Shanghai, Wuhan and Tianjin in 2012.

The new measures state that the securities regulator will simplify the administrative approval procedure and improve work efficiency by responding within 20 working days to OTC market applicants, the CSRC said.

A firm with less than 200 shareholders that applies for a public transfer on the OTC market will be exempt from the CSRC's review and will only require approval from the NEEQ, according to the CSRC.

The CSRC said the move is a follow-up to a statement from the State Council on December 14, which said the OTC market would be opened to qualified firms across the country.

"Expanding the OTC market nationwide will help small high-tech firms to raise funds in the equity market. [It will also] encourage innovative start-ups and boost job creation," Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times on Sunday.

The CSRC said the NEEQ will unveil details of the qualifications required for firms to start trading on the OTC market.

With the expansion of the OTC market, the number of high-tech firms trading on it is expected to hit 5,000 before long, up from 356 firms at present, according to Dong.

A more developed OTC market will ease the pressure from the long queue of IPO applicants by diverting some of them to the OTC market, he said, noting that it could also offer investment opportunities for institutional investors.

The OTC market will be suitable for institutional investors more than retail investors given the relatively high risks involved with small, fast-growing firms, so it will not divert existing individual investors away from the main boards, Dong noted.

Existing regional equity trading centers may no longer be needed following these new measures, China Securities Journal reported earlier this month.