China has unveiled a trial scheme allowing listed and unlisted companies to issue preferred shares in a bid to diversify their fundraising channels without diluting existing shareholders’ interests.
The move could help speed up the reform of state-owned enterprises (SOEs), analysts said.
Chinese banks, power generators and distributors, and transport operators will be given priority in joining the pilot scheme, China Securities Journal reported on Dec. 2.
The announcement came after months of market speculation that the government would open new financing channels for companies experiencing tight cashflow conditions amid a slowdown in the country’s economic growth.
Preferred shares have preference over common stocks when it comes to dividend payments and asset liquidation, but they ordinarily do not trade, have no voting rights and do not dilute net profits attributable to other shareholders. As such, they have limited impact on the interests of other investors.
The trial scheme could force SOEs to boost their dividend payments to preferred shareholders, thus enabling them to operate in a more market-oriented fashion, and diversify their shareholding structure to improve their corporate governance, analysts said.
With China adopting a market-driven economic model, SOEs will play an increasingly important role in the government’s reform agenda. The government is seeking new funding from the market to support SOE growth and consolidation. And the issuance of preferred shares is one way of attracting private investors without affecting the government’s control over the SOEs. Assurances of stable dividend payouts can lure long-term investors.
The announcement of the trial scheme came as the securities regulator also unveiled a plan to resume initial public offerings, which have been suspended since early last year as share prices of many newly listed companies fell below their offer prices as a result of their poor financial performance.
Many companies were left in dire need of financing to support their business activities whether for survival or expansion. The IPO resumption is aimed at answering this need, and so is the trial scheme for the issuance of preferred shares.
Preferred stock issuance, in particular, will strike a balance between the interests of corporations and their shareholders interest. It allows companies to raise funds without affecting their share price and profit attributable to ordinary shareholders.
According to the guidelines released by the State Council, the country’s cabinet, the preferred stock program will offer issuers a flexible direct financing tool, optimize their financial structure and help push forward merger and acquisition activities in industries.
For investors, the trial scheme will help diversify their investment channels by broadening the variety of securities in the market.
Under the guidelines, preferred stocks issued by a company cannot exceed 50 percent of the total common shares, and fundraising is not allowed to surpass 50 percent of the company’ net assets before public listing.
Public offerings of preferred shares will be subject to a number of rules such as a fixed dividend rate. While the rules provide for the distribution of after-tax profit to preferred shareholders, preferred shareholders are not entitled to the dividends received by ordinary shareholders.
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