Chinese securities firms may get the green light to invest directly in the equities of non-listed companies, a practice that has been banned since the 1990s.

Some securities companies are currently stepping up preparations for direct equity investment. While some have already submitted draft schemes to the regulator, according to market sources.

China Merchants Securities, a first-tier company, officially kicked off its project of direct equity investment early last year, while Great Wall Securities, a second-tier company, is now busy finishing preliminary research and preparation work.

"Those companies which are preparing for direct equity investment, are mainly encouraged by a speech made by Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC)," a person familiar with the situation said.

Early last December, in a speech in Shenzhen, Shang said China will build the Agency Share Transfer System, or the so-called third-board market, into a national platform where non-listed companies and high-tech companies can transfer their shares under unified regulation.

Shang also said China should establish a private offering market besides the public offering one, by studying the linkage mechanism between accredited investors and private offerings.

It is commonly believed this speech encouraged securities firms to look into direct equity investment of non-listed companies, though the CSRC has not yet offered any timetable.

Actually, the CSRC convened several meetings last year, discussing the possibility and operating practices of venture capital investment by brokerages.

Securities companies have been banned from investing directly in any industries since the 1990s.

The ban was spurred by failed investments among those was China Southern Securities.

Most of China Southern's real estate investments turned out to be non-performing assets, which triggered the company's collapse.

Now the CSRC is preparing for a pilot project and has asked about 15 qualified securities companies, all of which belong to first-tier companies under CSRC's classification, to submit plans of how they would directly invest in the third-board.

Initially only shares of small and medium-sized high-tech companies in Beijing's Zhongguancun High-tech Park, which are traded on the third-board, can be targeted by securities firms, though later the scope will be expanded.

As He Ying, assistant to the president of Guosen Securities believes, lifting the ban on venture capital investment could bring many benefits to securities firms, such as high yields of about 20 to 30 percent and the right to help innovative companies sell shares.

Given the source of the money, direct equity investment falls into two totally different models. The securities firms can either use their own money or use the capital raised from a separately incorporated investment fund or subsidiary company.

There is doubt over whether securities firms are suitable to operate direct investments themselves since they usually don't have enough in-house capital and have many other businesses to take care of.

But this model has at least one merit that the other one lacks, that is, the avoidance of possible embezzlement of the raised capital, such as has happened in the past.

As experts believe, private equity investment usually demands a huge amount of money, it takes a long time for investments to show a return and it often involves high risks.

Due to these considerations, the fund raising model for direct equity investment seems to be more practical, according to a report from the 21 Century China Business Herald.

However, no matter which model is chosen, the risk-control factor in addition to the feasibility factor has to be secured, since high risks were the main reason the securities regulator initially imposed a long-time ban on direct investment.

Source: China Daily