Tougher rules force hundreds of mainland-listed companies to review fundraising plans
The CSRC’s revised rules on fundraising eliminate the potential profit-making from arbitrage previously enjoyed by big investors, analysts say
More than 200 mainland-listed companies are to withdraw or revise their plans to raise capital after the regulator tightened the rules last Friday in a bid to curb “excessive fundraising” on the domestic stock market.
Shanghai-listed Industrial Securities, a mid-sized brokerage firm, scrapped its private share placement plan on Saturday, saying it did not meet the new frequency requirement for fundraising set by the China Securities Regulatory Commission(CSRC) on Friday.
The firm said it had raised capital within the last 18 months, which makes the new fundraising application impermissible under the updated rules.
“The company did a review and found the private share placement plan not in accordance with the latest fundraising rules set by the CSRC, and has decided to terminate the plan,” the company said in a filing to the Shanghai bourse on Saturday.
A listed company’s private share placement plan must not exceed 20 per cent of its share base, and should not be made within 18 months of a previous fundraising round by the firm, the CSRC said in a rule revision published on its official website on Friday.
According to the China-based Securities Journal, based on preliminary announcements, 192 A-share listed companies see their fundraising plans being potentially blocked by the new frequency restriction, while 240 companies see their fundraising scale exceeding the 20 per cent share base cap. The amount of stymied fundraising would come to billions of yuan.
Analysts said the revised rules will largely eliminate the “arbitrage room” big investors have tended to take advantage of, as the price setting for private share placement can now only be made based on the share price movement on the day of formal issuance. However, detailed rules are still pending.
In the past, the price for a share placement was usually made based on a company’s stock price movements on three dates -- the day the board disclosed the decision, the day the shareholders’ meeting approved the plan, and the day of formal issuance.
“Companies tend to set the price on the day of the first disclosure, then after the disclosure the share price of the company is usually speculated to a higher level, securing some profit for the big investors ahead of the day of formal transaction,” said financial columnist Guo Shiliang.
Felix Hu, who operates a mergers and acquisitions fund in Beijing, said the revised rules would directly rein in the fundraising activities of listed companies, particularly those in poor health.
“It has been a common practise by shell companies to raise funds for a variety of reasons. Big investors were privileged as they could often buy the shares at considerable discounts,” he said.
“Meanwhile retail investors would see their shareholding being diluted, as well as higher costs than the big players. Clearly the regulator is giving a sign that they are clamping down on fundraising based on no good reason, while increasing protection of small investors.”
Investment bankers, however, complain that the new rules overplay administrative restrictions, while underplaying market function.
A source close to the CSRC told the Post the regulator is collecting opinions on a draft restriction on big shareholders dumping their holdings on the secondary market. Investors attending the private placement of shares may face longer lock-up periods in the future that prevent them from selling their holdings immediately.
Brain Bai, an investment banker with a mid-sized brokerage based in southeast China, said although the revised rules seem very tough in the restrictions they place on price setting, frequency and scale for fundraising, there still is a way to circumvent them.
As the CSRC’s spokesman Deng Ge said in a press release issued on Saturday, share placement for the purpose of buying assets is not bound by the revised rules.
“For big shareholders, they could use the fund originally prepared to do private placement in asset investment first, and then raise funds on the stock market to inject this asset into the listed entity, as this kind of fundraising is not bound by the revised rules,” said Bai.
“I still think the scale and pricing for fundraising should be determined by the market. Investors should justify their own investment. The CSRC should not decide it for them.”
Non-financial companies seeking a share sale should not have a large balance of longer-term financial investments such as assets for trading or funds lent to others, the CSRC said, though it did not provide more details.
The revised rules will apply to all fundraising plans not yet submitted to the CSRC, while cases already under the regulator’s review will be exempt.
Listed companies raised over 1 trillion yuan via private placement of shares in 2016, eight times the proceeds raised through IPOs, according to the official Xinhua News Agency.
During 2015, funds raised by listed company reached 1.36 trillion yuan, 8.65 times the proceeds raised by IPOs.
The sharp contrast highlights the financing privileges of listed entities. But some shell companies have taken advantage of the rise in their share prices as interest in them as targets grows has grown, or they decided to raise funds to develop new or more-valuable business sectors such as tech, health care, entertainment or sport.