China stock market

CSRC introduces 1 per cent cap on major share sales after markets crash

New rules ‘useless’ in preventing stock slumps, says analyst

PUBLISHED : Thursday, 07 January, 2016, 1:35pm
UPDATED : Thursday, 07 January, 2016, 5:14pm

The mainland securities regulator has announced fresh restrictions on share sales by major stakeholders in listed companies, in a bid to prevent a punishing sell-off in an already battered stock market.

The new rules cap selling by major shareholders at 1 per cent or less of the company’s total shares every three months, the China Securities Regulatory Commission announced on its official website on Thursday.

A major shareholder is deemed to be one who holds 5 per cent or more of a company’s shares.

The rules apply to selling on the secondary market during the pre-opening session, when such big deals are usually carried out.

Shares held by major shareholders that were bought on the secondary market are not subject to the new rules, the CSRC said.

Under the new rules, an intention to sell should be announced to the Shanghai and Shenzhen bourses 15 trading days ahead of the transactions, it said.

Previously, shares acquired in lead up to the initial public offering by major shareholders and principal officials had to be held for at least a year, but could be freely traded once the lock-up period ended, subject only to disclosure requirements of the Shanghai and Shenzhen bourses.

Hong Hao, chief analyst with the Bocom International, said the CSRC was trying to calm investors by removing selling pressure, but the rules alone would be “useless” in preventing further market declines.

An hour before the announcement appeared on the CSRC website, the circuit breaker shut down the mainland stock markets at 9.58am, after the benchmark index CSI300 dropped 7.2 per cent.

It is the second time this week that the new mechanism has cut the trading day short. On Monday, a sharp drop in the CSI300 triggered a circuit-breaker closure at 1:33pm, suspending trading for the whole day.

The CSRC imposed a half-year ban on share selling by major shareholders and senior executives of listed companies on July 8 after the Shanghai Composite Index lost nearly a third of its value in about three weeks, a dramatic reversal from a seven-year high for the index set in mid June.

The new rules will come into effect on Saturday, a day after the earlier ban is set to expire.

However, analysts said there were always ways to bypass the restrictions.

“For example, a major shareholder can sell his holdings to a shell company on the primary market, and the shell company then could sell the shares on the secondary market,” said an unnamed analyst based in Shanghai.