China unveils pilot rules, paves way for firms to issue preferred shares for first time

China unveils pilot rules, paves way for firms to issue preferred shares for first time
Fri, Mar 21 2014
By Lu Jianxin and Kevin Yao
SHANGHAI/BEIJING (Reuters) – China’s securities regulator on Friday issued rules for a pilot programme allowing listed companies to issue preferred shares, paving the way for the long-awaited scheme to be launched soon in what the regulator called a major capital market reform.Three types of listed companies would be allowed to issue preferred shares either to the public and to institutional investors via private placements.
The firms include the 50 largest capitalized firms in the Shanghai Stock Exchange’s blue-chip SSE50 index .SSE50, the China Securities Regulatory Commission (CSRC) said in a statement.
Analysts have widely predicted the first preferred shares to be included in the trial will be shares in Chinese banks. Sources told Reuters last week that major state-owned banks, which are among China’s biggest index heavyweights, have already prepared share tenders.
The second group of listed firms include those which intend to acquire or absorb their counterparts by issuing preferred shares, while the third group covers those which aim to use preferred shares to replace existing ordinary shares, the CSRC said in the statement published on its microblog.
Non-listed companies can also sell preferred shares but only to institutional investors via placements, according to the new rules. Any firms issuing preferred shares to institutions must sold them to no more than 200 entities in one issue.
“The trial of preferred shares is a major reform and innovation in our country’s capital markets,” CSRC spokesman Zhang Xiaojun told a regular weekly presser in Beijing.
“The CSRC will continuously improve and perfect the preferred share mechanisms on the basis of summing up experimental experiences,” Zhang said.
Among other provisions, companies would be allowed to issue such shares in batches after winning regulatory approval for total quotas at one time, according to the CSRC statement.
CSRC officials had earlier this week said the time was ripe for China to start trialing preferred shares, and that all listed and non-listed companies could ultimately apply for issuance. Reuters reported earlier this month that the preferred shares experiment could be launched soon.
Preferred shares pay fixed dividends and enjoy seniority over common stockholders in the event of bankruptcy. But in other respects they have limited impact on common shareholders. They typically do not trade on the open market, carry no voting rights, and do not dilute net profits attributable to shareholders.
Stock market investors have thus been eagerly anticipating their introduction, hoping they will allow listed companies to raise funds from stock markets without diluting valuations.
In addition, many investors have long complained that too many listed firms are required to sacrifice profitability in favor of wider policy priorities.
They view the introduction of preferred shares as a way for the government to convert its massive holdings of traded shares into inert preferred shares, diluting government influence while increasing the value of other investors’ holdings.
China’s benchmark Shanghai Composite Index .SSEC closed up 2.7 percent on Friday amid widespread expectations of the launch of the pilot program of preferred shares.
However, many analysts say the impact of the new policy is likely to be limited in the near term, given factors including limited scale of issuance initially.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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