THE securities regulator is capping valuations for some reverse mergers, a listing method favored by companies that previously traded overseas, sources said.

    The China Securities Regulatory Commission decided that reverse mergers involving companies formerly listed on a foreign bourse can’t be valued at more than 20 times forecast profit, according to the sources. The valuation is calculated from the listed company’s estimated earnings following the deal, one of the sources said.

    Dozens of U.S.-traded Chinese companies, including search engine operator Qihoo 360 Technology Co. and ticket booking site Qunar Cayman Islands Ltd., have received buyout offers since the start of last year.

    Companies have announced more than US$50 billion of such take-private offers during the period, lured by the prospect of relisting at a higher earnings multiple in Shanghai or Shenzhen.

    Regulators have been concerned that the valuations mooted for some backdoor listings were too high and could affect the market’s stability, sources with knowledge of the matter said in May. Stocks on China’s exchanges trade at a median 41 times estimated earnings.

    Listed companies in China announcing a reverse merger transaction typically provide profit forecasts for each of the next three years. Some domestic investment banks recently received guidance on the new limit, the sources said last week. The CSRC hasn’t formally announced the new valuation cap, according to the sources.

    The CSRC has been limiting the valuations of domestic initial public offerings during the past two years. (SD-Agencies)