China’s securities watchdog on Feb 17 tightened the regulations on private placements by listed companies, aiming to curb their excessive fundraising which has led to speculative trading and market volatility.
The China Securities Regulatory Commission modified the refinancing rules and capped the maximum shares that listed companies can sell through private placements at no more than 20 percent of their total capitalization.
The new rules also require a time gap of at least 18 months from the previous share issuance by listed companies if they plan to refinance. In addition, listed companies, excluding financial companies, cannot hold long-term and high-value financial assets for trading and investment purposes when they apply for refinancing.
Deng Geng, the CSRC spokesman, said that the regulation is intended to address some of the serious problems with the existing system for refinancing, including the excessive financing by listed companies and using the proceeds for speculative trading.
“It has led to a short-term chase of profits and hurts the effective resource allocation and the formation of long-term capital in the market,” Deng said at a news conference.
Wang Jianhui, director of the research center at Capital Securities Co Ltd, said the restriction on refinancing underscored the regulator’s intention to channel more capital into the real economy and to curb speculation that could lead to greater financial bubbles.
Listed companies raised a total of 1.5 trillion yuan ($219 billion) through private placements last year, nearly 10 times the value of capital raised by companies through IPOs, according to data from Wind Info.
It is believed that a large portion of the capital raised by listed companies has been channeled into the wealth-management market and high-yielding and risky financial products through the shadow banking sector.
“The core of the regulation is to curb speculation in the financial market by listed companies. It is also in line with the overall financial deleveraging effort by the central government to prevent financial risks in the economy,” Wang said.
Wang estimated that the value of refinancing by listed companies could drop by at least 30 percent this year from the level of last year as a result of the new policy.
Guo Yanhong, chief strategist at Founder Securities Co Ltd, said the tightened regulations will have a positive effect on the stock market as it will mean better regulation over the financing practices by listed companies.
“The refinancing practices have been relatively loosely regulated. The new rules mean greater checks on fund raised by listed companies,” he said.