CSRC issues draft rules for preferred shares

Updated: 2013-12-14 00:04

By Cai Xiao (China Daily)

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Regulation will be released in Jan after comments by market players

The China Securities Regulatory Commission released draft regulations on Friday covering the issue of preferred shares, with final rules to be issued next month after comment by market participants.

Under the draft, three types of listed companies can publicly issue preferred shares: Shanghai Stock Exchange 50 index components (the largest by market capitalization); companies planning to acquire other listed companies by issuing preferred shares for payment, and companies buying back common stock that plan to decrease their registered capital by issuing preferred shares as payment.

"The market needs time to become familiar with preferred shares, and companies issuing preferred shares should have good corporate governance. Those are the reasons why we're limiting the companies that can make public issues of preferred shares," said Huo Da, deputy director of the marketing department of the CSRC.

Other domestically listed companies can conduct private placements of preferred shares through stock exchanges, as long as they comply with Chinese laws and rules.

Domestic companies that aren't listed on Chinese exchanges, and Chinese companies listed abroad, can apply for private placements of preferred shares through the National Equities Exchange and Quotations, the so-called “third board”, an equity exchange system for small and medium-sized enterprises.

Qualified investors in private placements of preferred shares include certain Chinese financial institutions and their financial products, qualified foreign institutional investors, renminbi QFIIs, partnerships and individual investors, among others.

Companies can set the par value of their preferred shares, but the issue price can't be less than the par value.

The total amount of a company's preferred shares shouldn't exceed 50 percent of its common shares, and the funds raised through issuing preferred shares may not exceed 50 percent of its net assets before the issue.

Li Yizheng, a vice-president at China Securities Co Ltd, told China Daily the move is a step forward in the Chinese capital market. Li said the market would determine the popularity of preferred shares. Some new types of corporate debt, Li noted, haven't been well-received in the market.

Banks would welcome preferred shares because their capital structure can be improved, said a manager at one of the four major State-owned commercial banks, who declined to be identified.

He said that preferred shares can be classified as core capital for commercial banks, and the offerings can improve their core capital adequacy ratios.

He added that the return for preferred shares is usually higher than for other financial products, so the shares will be popular with investors.