Accelerating Reform in China's Equity Market: Share Buybacks and Majority Shareholder Share Increases
July 02, 2005 | BY
clpstaff &clp articles &The China Securities and Regulatory Commission has issued further measures to help smooth the integration of tradable and non-tradable shares, but will they be enough to revive investor confidence?
By Christophe Han and Wayne Chen, Llinks Law Office, Shanghai
The China Securities Regulatory Commission's (CSRC's) launch on April 29 2005 of Issues Relevant to Pilot Reform Projects Regarding the Separation of Equity Ownership and Trading Rights of Listed Companies Circular (关于上市公司股权分置改革试点有关问题的通知)(Pilot Reform Projects), regarding the release of non-tradable shares into the open market, drew considerable attention from investors worldwide. More recently, on June 16 2005, the CSRC promulgated simultaneously the Administration of the Buyback by Listed Companies of Their Public Shares Procedures (Trial Implementation)上市公司回购社会公众股份管理办法 (试行)(the Procedures) and the Issues Relevant to Increases in the Holding of Public Shares by the Controlling Shareholders of Listed Companies after the Reform Regarding the Separation of Equity Ownership and Trading Rights Circular (关于上市公司控股股东在股权分置改革后增持社会公众股份有关问题的通知)(the Circular). The Procedures specify the relevant issues regarding the buyback of public shares of listed companies, while the Circular makes it clear that the controlling shareholders of listed companies can increase their holdings of public shares.
Although the Procedures do not explicitly refer to the separation of equity ownership and the Circular fails to touch on the substantial content set out in the Pilot Reform Projects, you can read between the lines to deduce their end-goals. Indeed, it is clear that the main purpose of the CSRC's latest regulatory releases is to maintain confidence in the market through the duration of the Pilot Reform Projects by allowing share buybacks and allowing majority shareholders to further their control through the open market.
BACKGROUND OF THE PROCEDURES AND THE CIRCULAR
It is necessary to get to know the history of reform in China's securities market before looking at the Procedures and the Circular.
The shares of most of China's listed companies are divided into two categories: non-tradable and tradable. The non-tradable shares refer to those not listed on a stock exchange for public trading, while the tradable shares refer to those listed on a stock exchange for public trading. By the end of 2004, the aggregate shares of China's listed companies were 714.9 billion, of which 454.3 billion, or 64%, were non-tradable.
Although both non-tradable and tradable shares have the same par value, the costs of obtaining tradable shares are much higher than that for non-tradable shares. Indeed, there are distinct trading methods and prices between the two categories of shares.
The prime goal of the Pilot Reform Projects is to "resolve the circulation issue of the non-tradable shares of the listed companies"
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