In a bid to boost market stability and support stock prices in a sluggish market, China has introduced a series of new regulations aimed at tightening the rules for listed companies seeking to raise funds using the equity route. These measures, unveiled by the Shanghai and Shenzhen stock exchanges, are part of a broader effort by financial regulators to bolster confidence in China’s US$9.6 trillion stock market, which ranks as the world’s second-largest.
The first significant change is the imposition of restrictions on companies whose shares are trading below book value or their initial public offering (IPO) offer prices. These restrictions will help reduce the supply of new shares entering the market, which can dilute the value of existing shares and hinder the overall performance of the stock market.
Another noteworthy change is the introduction of a minimum 18-month gap requirement between two rounds of refinancing for companies that have reported consecutive losses over two years. This limitation aims to discourage frequent fundraising by such companies and promote better financial discipline.
Furthermore, listed companies with a substantial proportion of their holdings in financial investments will be asked to limit their share offerings. This measure seeks to prevent overexposure to financial assets and encourages companies to focus on their core businesses. In a similar vein, companies with refinancing plans will be directed to use the proceeds from equity sales for investing in projects related to their main business. This approach aims to prevent disorderly investments across different sectors and encourages capital allocation to areas that can generate long-term value.
The new rules place specific requirements on stock prices leading up to refinancing share offerings. Companies seeking to raise funds through equity offerings must ensure that their stocks trade above their book value and offer price in the 20 trading days preceding the refinancing. This requirement is intended to ensure that companies coming to the market for additional funding are in a robust financial position.
However, it’s important to note that refinancing for projects of strategic importance and stock issuances for funding bailouts, business transitions, or introductions of strategic investors will be exempt from the new rules. This allows companies to continue their growth initiatives and attract strategic partners when necessary.
According to Wei Wei, an analyst at Ping An Securities, these new regulations will help strike a balance between investments and fundraising, ultimately ensuring stability in the secondary market. They are expected to lead to improvements in the quality of listed companies, prompting them to focus on their core businesses and increasing their market capitalization.
Despite previous government efforts to boost market sentiment, such as reductions in stamp duties, restrictions on short selling, and state-directed buying of banking stocks and exchange-traded funds (ETFs), the CSI 300 Index of Chinese onshore stocks has declined by 6.7 percent this year, making it one of the worst-performing benchmarks in Asia. These latest measures are designed to address these ongoing challenges and promote a more stable and robust stock market.
China’s move to tighten rules on equity fundraising by listed companies is aimed at restoring investor confidence, enhancing market stability, and directing resources towards high-quality, listed companies. By introducing these regulations, China is taking proactive steps to create a more disciplined and stable environment for investors and companies operating in its stock market.
(Source: Zhang Shidong | SCMP)
