Loophole exposed in delisting rules

ChiNext-listed Wanfu Biotechnology (Hunan) Agricultural Development Co soared by the 10-percent daily limit for three consecutive days after its shares resumed trading Friday. The triumphant return of the company, which had been found to have falsified its earnings reports between 2008 and 2011, has surprised many.

While revised regulations pertaining to the restructuring of listed companies prohibit ChiNext-traded companies from being acquired for backdoor listings, a judicial order helped Wanfu around this restriction. In a 140 million yuan ($22.6 million) debt case, a local court ordered Wanfu's controlling majority shareholders to transfer a 26.18 percent stake in the company to Taoyuan Xianghui Agricultural Investment Co. Wanfu will receive a capital injection under its new majority operator, enabling it to record a profit and escape delisting.

Such loopholes in China's delisting mechanisms are troubling. If regulators don't take action, companies that deserve to be removed from the market could follow Wanfu's example.