CSRC Reins In Private Stock Placements to Curb Abuse
(Beijing) — China is hitting the brakes on private placements of stock in the wake of signs that the equity financing method has been abused by many public companies — favoring selected investors with lower prices and hiding information from others.
The amount of funds raised by listed firms from private placements in November has fallen to less than 40% of all equity investments, down from an average of 92% for the previous 10 months, according to data provider Wind Information.
The other two main types of equity investment covered by Wind are initial public offerings and rights issues. The latter happens when a company gives its shareholders the right to buy additional securities in proportion to their existing holdings.
Many people working on securities underwriting said the China Securities Regulatory Commission (CSRC) recently has obviously slowed the pace of approving new private placements while permitting more IPOs.
The commission is making companies wait longer than usual at every stage of the review process in order to pace out the issuance of new stock through private placements, an investment banker said.
From October, at least 20 listed companies have issued notices to extend a deadline for their board’s decision to issue new shares due to failure to get the CSRC’s permission in time, according to stock exchange filings.
Analysts expect the regulator’s tough attitude on private placements to continue as it seeks to prevent companies from abusing the tool.
Private placements of stock are meant as an equity raising tool mainly for companies that would have trouble issuing new shares publicly because they fall short on profit and return-on-net-assets requirements.
“Over time, however, some public firms that are operating well and qualify for a public issuance started using private placements instead,” another investment banker said.
“This is, on the fundamental level, contrary to the regulator’s intention,” he said.
From January to Nov. 17, a total of 364 of the 384 listed firms that received the CSRC’s approval for additional fundraising went for a private placement of stock, according to the regulator. Only 10 applied for permission to sell convertible bonds. Another eight conducted a rights issue and the other two issued, respectively, preferred stock and a corporate bond. None of the securities issuances were conducted through public offerings.
Compared with public sales, private placements allow the issuing company to negotiate deals directly with select investors, setting a share price at often below-market levels and raising concerns about insider manipulation.
“Public issues, by contrast, face investors that cannot be chosen beforehand and make manipulation less likely,” an investment banker said.
The CSRC has taken action this year to monitor the pricing of private stock placements with more scrutiny, going so far as to require that the issuing price of stock with a three-year lock-in period, once set, can be raised, but not lowered. It also prohibited listed firms’ big shareholders from buying more stock through private placements using funds from asset management products. These measures were intended to prevent companies from underpricing stock to benefit insiders and related parties.
Still, companies tend to offer privately issued stock at steep discounts compared with the price of their publicly traded shares. The phenomenon was more obvious among companies that perform badly, according to Wu Xiaoling, a member of the standing committee of the National People’s Congress, China’s top legislature.
By offering big discounts, these companies were able to attract more investors, she said. This amplifies market fluctuations and lures capital resources away from good companies to poor ones, she said.
Contact Wang Yuqian (firstname.lastname@example.org); editor Ken Howe (email@example.com)
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