Oct 23, 2019 05:33 AM

Regulators Mull New Rules on Stock Sales Following IPO Lockups

A total of 1.29 trillion yuan of mainland-listed shares will be freed from IPO lockup over the next three months. Photo: VCG
A total of 1.29 trillion yuan of mainland-listed shares will be freed from IPO lockup over the next three months. Photo: VCG

Chinese regulators are mulling rule changes to better regulate listed companies’ major investors in selling their stakes after lockup periods following initial public offerings (IPOs) to prevent market volatility, Caixin has learned.

A proposed plan for the rule changes has been submitted to related authorities for review, sources told Caixin. Major shareholders in Chinese companies going public are barred from selling their stakes for at least a year after an IPO to limit market hype and reckless financing practices.

A number of domestically listed companies are approaching the expiration of IPO lockup periods. A Caixin calculation based on market data found that a total of 1.29 trillion yuan ($182 billion) of mainland-listed shares will be freed from IPO lockups over the next three months, affecting companies including courier giant SF Express Co. Ltd. and state-owned CNPC Capital Co. Ltd.

Massive lockup expirations often put pressure on stocks, said Li Lifeng, chief strategist of Sinolink Securities. The reviving market this year also encourages investors, especially those of poor-performing companies or over-valued stocks, to sell their holdings, Li said.

China’s securities regulator in 2017 issued strict rules regarding stake sales by major shareholders ― those that hold more than 5% of a listed company ― after IPO lockups expire. The rules cap the amount of stock one investor can sell at one time, regulate the way the shares can be transferred and require clear disclosure of the transactions.

Rising waves of stake sales lately have damped some companies’ valuations and fueled concerns of market fluctuation.

Shanghai-listed TF Securities slumped the daily limit for two straight days Monday and Tuesday as the lockup period for 1.83 billion of its shares expired one year after its IPO. The company’s market value declined by 6.8 billion yuan ($962 million) in two days.

The freed-up shares accounted for more than 35% of TF Securities’ total equity and were held by 36 investors. The investors gained nearly three-fold from stake sales of their initial investments thanks to a surge in the brokerage’s stock price over the past year, market records showed. TF Securities closed at 6.28 yuan apiece on Tuesday, compared with the IPO price of 1.79 yuan.

TF Securities issued a statement (link in Chinese) late Tuesday to restore investors’ confidence. The brokerage said 23 initial investors that are eligible to sell their shares promised to hold them for a longer period “due to confidence in the company’s long-term performance.” These investors hold more than 25% of TF Securities’ total equity, or nearly 71% of the shares recently freed from lockup, TF Securities said.

Several other companies are also under pressure as investors move to sell their shares after lockup. Shenzhen-listed Great Wall Securities will have 1.35 billion shares freed from IPO lockup Monday. The shares, about 44% of Great Wall Securities’ total equity, are worth around 18.6 billion yuan based on the company’s current price.

On the same day, Shanghai-listed Bank of Hangzhou will free 2.3 billion, or 19.8 billion yuan, of shares from lockup.

Over time, some investors have figured out ways to skirt the lockup restrictions such as by combining different types of transactions and using financial derivatives to shield transactions from oversight, analysts said.

During the first nine months this year, major shareholders of mainland-listed companies dumped 2.6 billion shares with a total value of 237.5 billion yuan, outpacing the 181 billion yuan of sales throughout 2018 and setting a record since 2016, market records showed.

As regulators prepare new rules, market sources said the success of the regulations will require better enforcement and tougher penalties for violators. Some companies have only made apologies without paying any costs for breaching existing rules, an investment bank source said.

Others said the rules should be carefully designed to avoid hurting investors’ legitimate interests in investing in startups.

Contact reporter Han Wei (

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