On 15 February 2017, the China Securities Regulatory Commission (CSRC) issued the Decision on Amending the Implementing Rules for the Private Offering of Shares by Listed Companies, without first seeking comments, followed by the issuance on 17 February of the Questions and Answers on the Regulation of Offerings: Regulatory Requirements for Guiding and Regulating Financing Acts by Listed Companies. The objective of the issuance of the new rules on refinancing is to guide the development of the refinancing market in a healthy direction.
Major provisions. Generally speaking, when a domestically listed company seeks refinancing, it can select a rights issue, secondary offering, convertible bonds, preference shares, etc. Secondary offerings can be further divided into public and private offerings. Since the threshold for private offerings is relatively low, the approval procedure is relatively simple, and the pricing method and timing are relatively flexible, they have become the refinancing method preferred by listed companies. Since the beginning of 2013, the private placement market has continued to be red hot. Even according to incomplete statistics, private placements totaled RMB1.69 trillion for the whole of 2016. However, as the size of refinancing has continued to increase, a series of issues has been exposed, such as excessive financing, arbitrage type financing, copycat financing, deceptive type financing, etc.
As a result, the following revisions have been made in the new rules:
(1) Regarding the number of shares offered, where a listed company applies for a private offering of shares, the number of shares proposed to offer may not exceed 20 percent of its total share capital before the offering; this revision is principally aimed at restricting excessive financing, which results in a large quantity of idle funds.
(2) Regarding the pricing mechanism, the provision specifying that either the announcement date of the board resolution or that of the resolution of the shareholders’ general meeting serves as the pricing reference date is abolished; instead, the first day of the private offering period serves as the pricing reference date. This provision does not signify the abolition of all discounts and offering at the market price, as the pricing mechanism by way of market-oriented price bidding will continue to apply to one-year private placements. Accordingly, this revision is mainly targeted at three-year private placements whose room for discounts is greater.
(3) Regarding offering intervals, where a listed company applies for a secondary offering, rights issue or private offering, the period between the date of the board resolution for the offering and the date on which the proceeds from the preceding offering (including an initial public offering, secondary offering, rights offer, private offering) were fully paid in may not, in principle, be less than 18 months, with the exception of proceeds from offerings of convertible bonds, preference shares and small rapid financing on a second board. This revision is principally aimed at reducing the frequency of private financings, putting a stop to the utilization of the capital markets for arbitrage and protecting the interests of small and medium investors.
(4) When applying for refinancing, a listed company, unless it is a financial enterprise, may not hold tradable financial assets of a relatively large amount and of a relatively long term or saleable financial assets, a loan to another, entrusted wealth management or other such financial investment as at the end of the most recent quarter. This restricts companies from blindly seeking financing, tying up social resources and causing funds to leave the real economy and kick over without generating anything.
Effects of new rules. The impact of the new rules will vary. Firstly, the new rules will make the private placement market cool substantially in the short run, the difficulty in raising funds will increase, offering prices will hew more closely to the market price and the room for profiting from private placements will, on the whole, continue to shrink, which will certainly offer room for the growth of such marginalized financing methods as convertible bonds, preference shares, etc.
Secondly, the Administrative Measures for Material Asset Restructurings of Listed Companies specify that the threshold and review criteria for backdoor listings are equivalent to those for IPOs. In practice, many listed companies have adopted the two-step method of “financing through a private placement first, followed by an asset acquisition”, circumventing the restructuring stage, and thereby avoiding the strict oversight to which backdoor listings are subject. This method currently lies in a grey area devoid of regulation, having a detrimental effect on the normal regulatory order in the capital markets. The revision of the pricing reference date for refinancing in the new rules will effectively collapse the room available for profiting from speculation in shell resources, and plug the loophole in the regulation of backdoor listings accomplished in a disguised manner. Additionally, room will be correspondingly opened up for IPOs, potentially breaking up the logjam in new share IPOs, thereby laying an important foundation for the implementation of the stock markets’ registration system.
Thirdly, from the perspective of the financing side, it is hoped that the new rules will induce funds to flow to quality listed companies, causing quality enterprises with solid endogenous growth to distinctly reveal their investment value, limiting the financing of pseudo-growth enterprises whose main purpose is arbitrage and asset-light enterprises that overly rely on external acquisitions for expansion, and improving the resource allocation function of the capital markets. Listed companies will be more rational when seeking refinancing, and the phenomena of speculation and excessive financing will be reined in.
Lastly, from the perspective of the investment side, private placement investment strategies and profit models will change accordingly, with the traditional single-profit model relying on high discount rates gradually withdrawing from the market, attention will be focused on companies’ growth potential and intrinsic investment value, and more profound and detailed fundamental research on the market. And companies will become more important, which will cause investment institutions to return to the principle of value investment.
Applications for refinancing that have already been received will not be affected by the new rules. To a certain extent, the new rules will correct some of the non-compliant phenomena that currently plague the market, make the financing channels in the capital markets more fluid and assist in the adjustment of the economic structure.
Jiang Fengtao is the founder and Liu Bing is a partner of Hengdu Law Firm. Wang Wei, a legal assistant, also contributed to the article
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