A Study On The VAM Application By Enterprises Of The OTC Market In Private Equity

Private enterprises have made great contribution to the promotion of China's economic development.Nowadays,with the globalization of economy,the problem of financing of private enterprises is becoming more and more obvious.Traditional financing methods,such as bank loans,internal financing,cannot meet the rapid development and expansion of corporate capital needs.Issuing company bonds,financing from stock market in China is so strictly regulated that most private companies cannot reach the relevant requirements.The start-up of National Equity Exchange and Quotation(NEEQ)in Chinese capital market has opened up a new way for enterprises to solve the financing dilemma.However,those companies in the OTC Market cannot get money through public issues,which are different from the listed companies in the main board,SME board and Gem board.At present,the only way for those enterprises is through private placement,but most buyers are private equity institutions with strong financial strength.As we all know,listed companies on the new three board have the potential for high growth and future development,usually facing great business risks.Furthermore,the regulatory system and information transparency of the new three board are inferior to those of other boards.For these reasons,investors would pay more attention on investment risks.Investors and investee companies sign a set of contracts which are also called “VAM” in order to lower investing risks.Bet-on agreement,also called the Value Adjustment Mechanism(VAM),is first introduced into China through overseas venture investment institutions to invest in domestic pioneering enterprises.Its essence is a mechanism that the two parties are constantly adjusting and intending to approach the real value of the enterprise according to the future operating condition of the target enterprise.The VAM have been widely used in China's capital market because it can effectively solve the problem of inaccurate valuation of target enterprises caused by development risk,uncertainty and asymmetric information.Nevertheless,because management did not really understand its connotation,they signed unrealistic agreement in order to obtain short-term funds.In china's capital market,the failure of the VAM frequently occurred.For example,Yongle Electrical Apparatus,South Beauty and other domestic well-known enterprises have fallen into the betting dilemma,or even lose control of the enterprise.But if the content of the agreement can be well planned,the enterprise can use the agreement to obtain the development funds,realize the rapid development of the enterprise and promote the maximization of the enterprise value.For example,Mengniu was using the money obtained from a VAM to achieve the expansion of the enterprise.In view of this,through discussion of the successful cases in our country private enterprises may provide the reference experience for our country enterprise to use the gambling agreement financing,and also provide a new channel for solving domestic private enterprises financing predicament.The method of this paper is combined with theories and case analysis to study gambling agreement applied by Xinjiang Torch in the OTC Market.Besides,this paper makes a comprehensive and systematic analysis of the background information,strategic motives,target design,content planning,risk control and implementation effect of this gambling agreement.After case analysis,this paper summarizes the successful experience of Xinjiang Torch,obtains the research conclusion and provides the suggestions for our private enterprises financing.Five parts are concluded in this paper.The first part is about some introduction,which introduces some background information,describes research significance and makes literature review.The second part introduces some basic theories,including the connotation and characteristics of private equity,the connotation,application scope and target of the gambling agreement.The third part mainly introduces information of Xinjiang Torch.Besides,the reasons why this company chooses obtain money through the gambling agreement.The fourth part is the analysis of the case.This part starts with analyzing strategic motives of the gambling agreement.Then it analyzes the principals and contents of VAM.Besides it describes the measures and risk control that the company takes to achieve the goal of this agreement.Finally it concludes the implementation effect.Part five is the research conclusion and experience revelation of the case.From the case analysis,this paper concludes that the uses of the gambling agreement is beneficial to obtain the funds needed for the expansion of the Xinjiang Torch,which enables the enterprise develop rapidly,meet the requirements of the enterprise development and investors,and finally achieves the "win-win" effect on gambling.Through this case,in order to success in this kind of gambling,private enterprises should consider internal environment and external opportunities.At the same time,companies should design those terms carefully and strengthen risks control.We also hope to deepen the connotation of VAM and provide some experience for Chinese enterprises to use gambling agreement successfully.