New rules for refinancing by listed companies

On 15 February 2017, the China Securities Regulatory Commission (CSRC) issued the Decision on Amending the Implementing Rules for the Private Offering of Shares by Listed Companies, without first seeking comments, followed by the issuance on 17 February of the Questions and Answers on the Regulation of Offerings: Regulatory Requirements for Guiding and Regulating Financing Acts by Listed Companies. The objective of the issuance of the new rules on refinancing is to guide the development of the refinancing market in a healthy direction.

Major provisions. Generally speaking, when a domestically listed company seeks refinancing, it can select a rights issue, secondary offering, convertible bonds, preference shares, etc. Secondary offerings can be further divided into public and private offerings. Since the threshold for private offerings is relatively low, the approval procedure is relatively simple, and the pricing method and timing are relatively flexible, they have become the refinancing method preferred by listed companies. Since the beginning of 2013, the private placement market has continued to be red hot. Even according to incomplete statistics, private placements totaled RMB1.69 trillion for the whole of 2016. However, as the size of refinancing has continued to increase, a series of issues has been exposed, such as excessive financing, arbitrage type financing, copycat financing, deceptive type financing, etc.

As a result, the following revisions have been made in the new rules:

(1) Regarding the number of shares offered, where a listed company applies for a private offering of shares, the number of shares proposed to offer may not exceed 20 percent of its total share capital before the offering; this revision is principally aimed at restricting excessive financing, which results in a large quantity of idle funds.

(2) Regarding the pricing mechanism, the provision specifying that either the announcement date of the board resolution or that of the resolution of the shareholders’ general meeting serves as the pricing reference date is abolished; instead, the first day of the private offering period serves as the pricing reference date. This provision does not signify the abolition of all discounts and offering at the market price, as the pricing mechanism by way of market-oriented price bidding will continue to apply to one-year private placements. Accordingly, this revision is mainly targeted at three-year private placements whose room for discounts is greater.

(3) Regarding offering intervals, where a listed company applies for a secondary offering, rights issue or private offering, the period between the date of the board resolution for the offering and the date on which the proceeds from the preceding offering (including an initial public offering, secondary offering, rights offer, private offering) were fully paid in may not, in principle, be less than 18 months, with the exception of proceeds from offerings of convertible bonds, preference shares and small rapid financing on a second board. This revision is principally aimed at reducing the frequency of private financings, putting a stop to the utilization of the capital markets for arbitrage and protecting the interests of small and medium investors.

(4) When applying for refinancing, a listed company, unless it is a financial enterprise, may not hold tradable financial assets of a relatively large amount and of a relatively long term or saleable financial assets, a loan to another, entrusted wealth management or other such financial investment as at the end of the most recent quarter. This restricts companies from blindly seeking financing, tying up social resources and causing funds to leave the real economy and kick over without generating anything.

Jiang Fengtao is the founder and Liu Bing is a partner of Hengdu Law Firm. Wang Wei, a legal assistant, also contributed to the article