Securities Regulator Tightens Rules to Bar Stock Dumping

(Beijing) -- China's securities regulator issued new rules on the percentage of listed companies’ equity that big stockholders can sell and imposed detailed limits on the timing of sales. The government watchdog said the regulations are intended to reduce market volatility and encourage long-term investment.

The new restrictions elaborate on limitations issued in January by the China Securities Regulatory Commission. They bar major shareholders from dumping their stakes in an intensive and massive manner, or using another party for a sell-off, and take effect immediately, according to a CSRC document issued Saturday.

China has begun tightening scrutiny of big shareholders’ equity disposal after the market meltdown in the summer of 2015, when 40% of the market’s value was wiped out in few months. The new rules are aimed at preventing large stock sales by major shareholders that have disturbed market order and damaged investor confidence, said CSRC spokesman Deng Ge.

Liao Ling, an analyst at GF Securities, said the new policy would help to reduce the impact of major shareholder’s stock sales on other investors and encourage long-term investment, but it may also hurt market liquidity. The effects of the policy should be carefully watched, Liao said.

China’s stock market is closing for the three-day national holiday that started Sunday honoring the ancient poet and politician Qu Yuan, who lived around 300 B.C. Trading will resume Wednesday.

In January, the CSRC capped stake sales by major shareholders at 1% of a company’s total shares every three months. The watchdog agency also warned that shareholders will be held accountable for false disclosures, insider trading and stock market manipulation. The CSRC defines major stockholders as those owning more than 5% of a listed company’s equity.

The latest policy further tightens control over big shareholders’ sales and spells out detailed requirements. The Shanghai and Shenzhen stock exchanges also issued detailed guidelines for implementing the new rules on Saturday.

The new policy elaborates that the 1% cap on sales by major shareholders every three months applies to sales through IPOs, share placements, pledging of stock as loan collateral, and issuance of convertible bonds. The holdings of major shareholders who act in concert with associated parties will be counted together, the CSRC said.

Major shareholders are also barred under the rules from transferring more than 2% of a company’s equity to a third party via so-called block trades, or privately negotiated transactions involving large amounts securities. Buyers of shares through block trades are not permitted to sell the shares again within six months, a move to prevent major shareholders from skirting the rules via a third party.

The CSRC requires that major shareholders disclose their stake-selling plans 15 trading days in advance, as well as report on progress and results of such sales.

Deng said the new rules will help direct more capital to support the real economy and have positive impacts on market liquidity and investor confidence.

The securities regulator will continue efforts to tighten market oversight and root out irregularities, including false disclosures, insider trading and market manipulation, Deng said.

The commission is also working on rules regarding the exit of venture capital investors from listed companies to reduce their costs and encourage investment, Deng said.

Contact reporter Han Wei (weihan@caixin.com)