Adjustment Is Expected To Heat Up Regulation: Pledge Risk And Other Side Effects Usher In A Revaluation

The expectation of the adjustment of shareholders' reduction policy in listed companies has been increasing continuously in the capital market.

In twenty-first Century, the economic news reporter learned from the broker dealers close to the regulatory level that regulators are reassessing and studying the impact of the new regulation since 2017, or to a certain extent, according to the latest changes in the market, to standardize the reduction activities in a more market-oriented way.

Some analysts pointed out that the reduction of major shareholders and other important shareholders is mainly a neutral market behavior, and the impact on market prices is relatively limited. Some stringent restrictions before the new rules have hindered normal market behavior to some extent.

Reduction or restriction or revaluation

In the view of the industry, it is necessary to reassess and evaluate the impact of the reduction of the new regulation in 2017.

"At the time, the starting point of the new regulation was to restrict some cash transactions that disrupted the market order, while taking into account the impact of market fluctuations." A strategic analyst at a brokerage firm in Beijing said, "but in fact, the long-term impact of the reduction of major shareholders on the market is not large."

From the data point of view, the reduction of activities in normal A share trading is very limited.

Wind statistics show that as of October 23rd, a total of 1523 listed companies in the A share market had reduced their holdings, accounting for 41.07%, accounting for 254 billion 987 million yuan in total holdings, accounting for only 0.24% of the total annual turnover of A shares. This also shows that the reduction of important shareholders in active market transactions accounted for a very limited proportion.

It is worth mentioning that some data show that the reduction of the new regulation does not curb the demand of large shareholders, but stimulates further reduction in the number of events.

In twenty-first Century, the economic statistics reporters Wind statistics found that 2332 major shareholders' reduction events completed in 2018 (separate calculation among different shareholders of the same company), and 1191 more than 2017 (1141 cases) less than one year after the implementation of the new rules.

"Limiting the reduction will give priority to the reduction of some shareholders with conditional reduction." A listed company in Beijing said: "for example, some shareholders may have a fixed increase plan, so in the case of guaranteeing the same equity ratio, it is natural to give priority to reducing certain stocks, so as to prevent the reduction of the new rules when future reduction arrangements are made."

Some analysts also point out that the reason for this phenomenon is related to the demand for large shareholders to reduce liquidity in the stock market in 2018.

"Credit supply in 2018 is not particularly ideal, so reducing the leverage to reduce the leverage has become the choice of some shareholders. Even in some risky stock pledge projects, some shareholders can only reduce the stock without the pledge to obtain liquidity in order to prevent the explosion of the warehouse." A securities broker engaged in stock pledge financing said frankly, "a variety of reasons have resulted in an increase in the number of holdings."

Hidden side effects

In fact, the controversy over the industry has been ongoing since the new regulation was issued in 2017.

"Reducing the new rules to some extent obstructs the normalization of transactions in the market, and the restriction on the reduction of important shareholders will easily affect the enthusiasm of some listed companies in big capital strategic investment." The broker analyst pointed out.

Insiders also pointed out that some restrictions on the reduction of new shareholders' behavior by the new rules have not only affected the capital turnover of the relevant shareholders, but also derived some financial risk events.

In twenty-first Century, the economic news reporter was informed that a major shareholder of a listed company in East China failed to reduce some of the non restricted shares to repay loans in the second half of 2017 because of the reduction of the new rules. Therefore, it had to be forced to place additional stock pledge on the sidelines, which indirectly led to the improvement of the overall pledge rate of the company. Finally, the majority shareholder of the company broke out of stock pledge risk in the second half of 2018.

"If we could get liquidity through reduction, then we wouldn't have to go to the level of pledge." The listed company holding company said, "reducing debt repayment does not increase the financial cost, and it is equivalent to the cancellation of part of the debt with some assets. It is a normal measure of lowering the leverage of the enterprise, and to shareholders, although it has diluted the shareholding ratio, it does not affect the control rights."

"The result of the pledge is not only the leverage ratio has not fallen, but it has assumed more financial costs." Those holding companies said frankly, "of course, after the explosion, the stock price has been falling, and there is no condition for the agency to dispose of it, but on the whole, it is a losing situation."

In addition, the "hypothecation" reduction motive of some major shareholders exacerbated the moral hazard of stock pledge activities.

"The purpose of some major shareholders to pledge shares is to reduce the discount, and the final result is that these major shareholders not only circumvent the requirements of the letter, but also leave the risk of bad debts to the agencies." The securities dealers who engaged in stock pledge financing said frankly, "if it is normal reduction, the shareholders of listed companies should not only meet the market expectations through announcements, but the actual reduction operation is also a process of chronic coherence, but ultimately, the result of the pledged explosion will aggravate financial risks".

It is worth mentioning that, for the problems arising from the reduction of the new rules, regulators have also "patched". For example, in order to reduce the difficulty of withdrawal of some venture capital shareholders, the SFC made special provisions on reducing shareholding of venture capital shareholders in June 2018, and linked the investment period with the lifting of the ban period, which provided conditional exemption for the reduction activities of long-term equity investment institutions.

"After the assessment of the new rules, I believe there will be more cautious and more detailed rules." The analysts said.