Chinese regulator tightens rules to pace substantial shareholders’ stake disposals

PUBLISHED : Sunday, 28 May, 2017, 5:55pm
UPDATED : Sunday, 28 May, 2017, 11:25pm

China’s securities regulator has ordered substantial shareholders to pace the disposals of their stakes in publicly traded companies, anxious to manage any sharp jumps or plunges in stock prices amid a politically sensitive year in Asia’s largest capital market.

Substantial shareholders are barred from selling their holdings through so-called block trades, in a manner that may “maliciously” cause prices to plunge and hurt public confidence, according to a weekend notice by the China Securities Regulatory Commission (CSRC).

Executives who are also substantial shareholders will be barred from skirting the rules through reigning their corporate posts, the regulator said. The holdings of substantial shareholders who act in concert with associated parties will need to be counted together, CSRC said.

China’s stock regulators, burnt by a 2015 crash that wiped trillions of yuan of value from equity investors’ accounts, have been tightening the rules on the Shanghai and Shenzhen bourses ever since. They are particularly concerned to avoid any market turbulence from spilling over into social flashpoints to ensure smooth sailing for the Communist Party’s most senior leadership as the lineup is scheduled for change later this year.

The latest moves may work this time, said Shan Shan Finance’s fund manager Wu Kan.

“Restrictions on the sale of big shareholdings will likely have a notable, positive impact on the stock market next week,” Wu said. “Previously, shareholders conducted block trades which was very negative to the market, but that loophole has been fixed now.”

The latest restriction also signals the regulator’s concern over increasing disposals by major shareholders amid slower economic growth. If left unchecked, excessive leverage may spiral out of control and sharply weigh on financial markets and spread into the real economy.

The Shanghai Composite Index has remained subdued in the past year, trading in a narrow range of between 2,700 and 3,200. Chinese investors fled the A-share market last month, causing a tide of southbound funds into the cheaper Hong Kong market.

Listed companies will be required to improve their disclosures of any reductions in shareholdings, and those found to have made misleading disclosures will be severely punished, the CSRC said in its latest notice.

To be sure, China’s stock market already contain plenty of restrictions. The CSRC capped any sales by major shareholders at 1 per cent of the company’s total shares every three months, according to a January 2016 notice.

The daily price movement for stocks and mutual funds are also limited to 10 per cent in either direction, with the exception of first-day debuts which can’t rise by more than 44 per cent or plunge by more than 36 per cent.

Since most Chinese initial public offerings are priced no more than 23 times earnings, that makes stocks appear undervalued during their listing, which draws investors to flock to them, sending stock prices soaring on debut.

The regulator may also slow down the pace of approving new IPOs, amid concern that a flood of new listings would suck up liquidity from the capital markets, Reuters reported, citing a press conference last week by the CSRC spokesman Deng Ge.

The weekly amount of funds allowed to be raised was reduced to 2.3 billion yuan (US$336 million), less than half of the average 6 billion yuan that’s typically raised every week, Reuters reported.

The CSRC has also revised its underwriting rules, freeing the subscribers of convertible bonds from having to hand over money before they are awarded the allotted securities.

Under the current system, convertible bond issuance would “freeze up a massive amount of capital, disrupting the money and bond markets,” the regulator said, according to Reuters’ report.