Securities regulator issues new rules to curb hostile takeovers

Guidance from the CSRC tightens conditions for existing major shareholders to buy more stock in companies

PUBLISHED : Wednesday, 27 July, 2016, 3:55pm
UPDATED : Wednesday, 27 July, 2016, 10:59pm

China’s securities regulator has barred existing major shareholders from using borrowed money or newly raised funds to participate in share placements by listed firms, in a move to curb hostile takeover bids.

The China Securities Regulatory Commission (CSRC) has issued what it called a “window guidance” to investment banks, under which share owners who own at least 5 per cent of a listed firm cannot use money netted through the issuance of wealth management products or capital raised from third-party fundraising platforms, to buy additional shares in the company.

According to a CSRC official, a clutch of investment bankers have been informed of the decision to tighten supervision on major shareholders’ purchase of placed shares in a recent training session by the regulator.

The new guidance is less than a rule change, but the regulator does have the power to implement any change without revising the rule if it requires.

“Stability is still given the priority by the regulator,” said He Yan, a hedge fund manager with Shanghai Shiva Investment. “But at the end of the day, the regulator needs to fine-tune the existing rules and strictly implement them to ensure market stability.”

The new measure reflects the CSRC’s growing worries of more controversial hostile takeover attempts on the secondary market without a clear-cut rule governing the source of the buyout funds, following the fierce battle for control of China Vanke, the world’s largest homebuilder.

Last week, Vanke filed an open letter to the securities regulator, charging its biggest shareholder Baoneng Group with raising funds illegally to pay for large purchases of the developer’s shares.

Baoneng, through leverage buying, now controls 25.4 per cent of Vanke.

Led by chairman Wang Shi, Vanke accused Baoneng of violating regulations as it increased its stake in the company since late last year through high-leverage asset management programmes.

Shares of Vanke plunged 28.7 per cent since trading resumed on July 4, heightening the risks of a collapse of Baoneng’s leveraged capital chain.

Due to a lack of coordination among the banking, securities and insurance regulators, the mainland stock market has often fallen victim to unbridled fund flows that caused boom-to-bust scenarios.

An investor could raise funds via wealth management products issued by banks or set up buyout funds through limited partnership to replenish its takeovers bid for a listed firm.

But it is difficult for the securities regulator to make a judgement on the legality of the funds used for hostile takeovers based on the existing rules.

The CSRC stepped up the policing of refinancing and asset revamp deals by listed firms in June, taking a firm stance against reverse mergers, particularly, in the A-share market.

Following a stock market rout that wiped out US$5 trillion (HK$38.8 trillion) of capitalisation last year, the regulator has also been tightening its grip on initial public offerings and share placements, by introducing a stricter review process of applications.