“Investors should look at whether the restructuring would help the company regain profits. They could select those industries that are closely connected with their business, which makes it more realistic to improve the restructured companies,” he added.

Details of these requirements were set out in the Regulatory Guidelines for Listed Companies No.1 — Regulatory Requirements in Respect of an Outstanding Deficit After a Material Asset Restructuring by a Listed Company (上市公司监管指引第1号—上市公司实施重大资产重组后存在未弥补亏损情形的监管要求).

Listed companies are likely to face difficulties in financing. “They are now unable to distribute cash dividends to shareholders and are unable to refinance through public offering,” said Zhong Lin of Shanghai-based Chen & Co.

“These problems will have an adverse effect on the business operations of listed companies and the judgment of investors,” he added.

According to the Guidelines, listed companies are required to disclose all the existing accumulative losses inherited during the asset reorganisation. They are not allowed to pay shareholders cash dividends in the long term or refinance through publicly issuing securities.

Zhu said that the policy is aimed at rebooting listed companies that have suffered long-term losses, but not as a tool for investors to make money.

The government wants to encourage listed companies to restructure as a way to optimise the allocation of resources and improve their performance in the long run.

By Janice Qu

Further reading:

China Securities Regulatory Commission, Rules for Determining the Administrative Liability for Acts of Violation of Information Disclosure Laws
中国证券监督管理委员会信息披露违法行为行政责任认定规则

New Disclosure Standards for PRC Listed Companies