Mainland unveils new measures to cool stock market
Amy Gu and Lee Yuk-kei
The central government has stepped up efforts to cool the country's stock markets by strengthening rules to bar listed companies from using share-sale proceeds to buy stocks.
The move is also intended to cut investment risks taken by listed companies.
Under the new rules, listed companies are banned from using share-sale proceeds to buy shares, either through private placements or public subscription, in companies making initial public offerings, the China Securities Regulatory Commission said in a notice published on its website yesterday.
They also are barred from buying traded stocks, stock-related derivatives and convertible bonds.
The notice, dated February 28, said a listed company could only invest share-sale proceeds in its own core business.
The rules are seen as the latest attempt to curb listed companies from playing the domestic stock markets, which surged more than 100 per cent last year.
In particular, many companies have been attracted to IPO stocks, which often surge on their first trading day when there is no limit on how much the stock can rise.
'Profit-driven companies such as privately owned ones are more likely to put the proceeds [from their own share sales] deposited in the banks back into the stock market in order to boost their profitability,' said Zhang Gang, an analyst with Southwest Securities.
Such investment, though banned by the regulator, was possible through illegal transfers, Mr Zhang said.
JP Morgan China equity strategy vice-president John Tang said the edict was intended to dampen down the stock market.
Oversubscription of many IPOs arose partly from the misuse of share sale proceeds to subscribe to new offerings, he said.
The central government has tried various ways to limit the amount of money flowing into the stock markets, including targeting equity fund investments by suspending the launch of new mutual funds for about a month last year.
Since January, it has investigated misuse of bank loans for investment in stocks.
Analysts said the latest measure would have little impact on the A-share market as share sale proceeds made up a tiny portion of the market liquidity.
The Shanghai and Shenzhen composite indexes both fell almost 9 per cent last month, their biggest falls in 10 years, as investors grew concerned at the measures to cool the market. Even so, the Shanghai market has gained 13 per cent this year and Shenzhen is up 44 per cent.
Mainland regulations require listed firms to seek shareholder approval if they plan to change the use of proceeds from what was stated in the listing documents.
But the rules do not specifically ban listed firms from investing in stock markets.
Mr Zhang said the latest directive specifically ruled out equity investments, even if companies had secured shareholders' approval.
The regulator said it would require listed firms to publish their use of share-sale proceeds in annual reports and would punish companies and management if any serious misuse was found.