Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC), is known for being outspoken.
Previously, he called insurers engaged in leveraged buyouts using inappropriate funds “barbarians” and “evil monsters”.
Now he is declaring war on “big crocodiles”, referring to tycoons who wield capital power to manipulate stock prices and disrupt fair market play.
“No one will be allowed to create winds and waves in the stock market. The big crocodiles will not be allowed to suck the blood out of small investors,” Liu said.
So how do these tycoons suck the blood out of small investors?
It usually has to do with private placements.
By withholding positive news or even deliberately releasing some bad news to suppress company stock prices, controlling shareholders will then announce a private placement, selling shares in large chunks to themselves or their friends at depressed prices.
Good news, which can be anything from strategic partnership with a new shareholder to a new business will then be announced or cooked up.
Share prices usually jump and these tycoons can take huge profits.
A bit of history will help in understanding why private placement is so popular in China’s domestic stock market.
Chinese regulators had been very supportive of private placements between 2009 and 2014.
Due to the sluggish market, authorities suspended listings for years and discouraged listed firms to make public share offerings to raise additional funds, fearing these will hurt the market further.
The private placement market thus became the most important fundraising channel, which has raised 5 trillion yuan (US$730 billion) since 2006, dwarfing the market for initial public offerings (IPO) and public share offering, which raised 2.2 trillion yuan and less than 1 trillion yuan, respectively, during the period.
Rules on private placement have been lax. For instance, new shares can be offered as much as 30 percent lower than the last price before the placement announcement is made. There is no cap on the size of the offering either.
Interestingly, although such activities are dilutive, retail investors tend to view the expansion of capital as good news and a catalyst for speculation.
Such rampant private share placements in A shares may come to an end.
On Feb. 17, the CSRC unveiled new curbs on how much and how often the country’s public companies can issue new shares, along with restrictions on how the offer prices are set.
The amount of additional shares issued through private placements can’t be more than 20 percent of a company’s total shares, the CSRC said in its weekly press briefing in Beijing on Friday.
It also said after certain private placement is done, companies have to wait 18 months to do another round of such placement.
This article appeared in the Hong Kong Economic Journal on Feb. 20
Translation by Julie Zhu
[Chinese version 中文版]
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