(Yicai Global) Feb. 20 -- China's securities regulator has amended rules to curb excessive financing by listed companies and divert funds from financial investments toward real economy sectors.
The new rules aim to divert investors' attention away from short-term profits and toward value investments, experts said. The rules enable healthy investment by requiring proceeds from equity financing to be effectively used, they said.
Refinancing among listed companies has increased at an alarming rate. In some cases, excessive financing was pumped into fake projects or for speculative investment. Proceeds raised by some listed companies were left idle, or covertly put into financial investments or quasi-financial businesses, such as wealth management products. Last year, refinancing on the Shanghai and Shenzhen stock exchanges totaled CNY1.79 trillion (USD261 billion), almost 13 times the total value of IPOs during the same period.
The China Securities Regulatory Commission amended the rules three days ago, with changes including:
- Capping the number of shares issued in a private placement to 20 percent of the total share volume before the deal.
- Requiring listed companies to wait 18 months between financing rounds, including initial public offerings, additional share issuances, share allotments and private placements.
- Limiting trades to market price, which will be determined on the first day stocks are issued.
Convertible bond offerings or preferred stock, and fast financing of a relatively small value on the Growth Enterprise Market are exempt from restrictions.
The regulator announced two days ago that the new rules also apply to private placements conducted by listed companies for asset purchases through share financing, and the volume of these private placements will also be restricted to 20 percent of the total capital stock.
"Through refinancing, listed companies could previously issue securities as quasi-financial institutions, but the new rules restrict this power," a representative at a major Shanghai brokerage told Yicai Global. The new policy will come as a serious blow to shell stocks, he added.
Almost 40 percent of additional share issues carried out by listed companies between 2010 and 2016 exceeded 20 percent of their capital stock before shares were issued, according to data from Huatai Securities Co. [SHA:601688]. The new cap will significantly reduce refinancing this year, a senior investment bank manager said.