CSRC tightens grip on private placements

To boost transparency, China’s regulator has banned major A-share company shareholders from using asset management products to subscribe to private share placements.

China’s securities regulator has banned major shareholders from using asset management products to subscribe to private share placements, to help improve the transparency of domestic capital markets.

The China Securities Regulatory Commission's new "window guidance", which will apply to all A-share listed companies, was given earlier this week to both domestic brokerage houses and foreign investment bank joint-venture securities firms, according to Chinese media reports and two Beijing-based investment bankers familiar with the issue.

The new rules stipulate that shareholders with more than a 5% stake in a Chinese company listed on domestic markets must invest directly in its share placements rather than indirectly purchase new shares through asset management products or third-party limited partnerships.

“The direct participation of major shareholders could improve the transparency of a company’s shareholder structure," one of the bankers, based at Citic Securities, told FinanceAsia. "Otherwise, they could easily disguise their real holdings and seek arbitrage.” 

The CSRC also now prohibits these companies from using the monies raised this way to pay for non-capital expenditures, such as staff salaries or raw materials, the two bankers said.

The new guidance comes at a time when A-share listed companies are increasingly flocking to raise fresh capital through private placements. That's after the CSRC tightened its grip on public share sales and slowed the pace at which approved new initial public offerings following last summer’s stock market rout.

According to financial data provider Wind Information, Chinese companies raised about Rmb520 billion ($78 billion) from A-share placements in the first five months of 2016, compared with Rmb23 billion ($3.46 billion) raised from IPOs over the same period.

Some domestic companies, however, have failed to clarify the reasons behind their fundraising activities or misused the capital raised from placements, the two bankers said.

“The CSRC doesn’t [want to] encourage companies to use the proceeds to improve liquidity or pay back banking loans. It wants the capital to be used for boosting the real economy,” said the banker at Citic Securities.

Window guidance generally refers to the practice of Chinese officials offering verbal instruction by a window in a government office building. It is akin to moral suasion and has been increasingly used by the Chinese financial regulators in recent years, as it enables them to give more timely directives to smoke out market malpractice.

“Window guidance isn’t a legally binding rule but it’s issued by the CSRC anyway. If you don’t abide by it, the regulator would probably reject your application [for the placement],” said the second banker at CICC. 

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