March 23, 2020 / 4:59 AM / in 14 days

Chinese companies delay fundraising plans after watchdog tightens rules

SHANGHAI/HONG KONG (Reuters) - At least 10 Chinese firms have said they could delay or change plans to raise funds via private share sales after regulators closed a loophole in recently loosened rules designed to help companies battling the economic impact of the coronavirus.

Chinese Yuan banknotes are seen in this illustration taken February 10, 2020. REUTERS/Dado Ruvic/Illustration

The China Securities Regulatory Commission (CSRC) eased conditions for private placements last month, allowing bigger sales at deeper discounts and tripling the maximum number of participating investors.

Only investors classified as “strategic” can take full advantage of the relaxed rules. However, without an accompanying definition, a number of firms designated key executives and unrelated fund managers as strategic investors.

This led to fear among lawyers and analysts of insiders buying cheap shares to sell later at a higher price without contributing to a company’s value.

Since the relaxation, 130 companies have published share sale plans, about half of which named strategic investors, according to Shanghai Securities News, a publication affiliated with the state-run Xinhua News Agency.

Late on Friday, the regulator elaborated on its definition of strategic investor, saying they must own key resources and participate in the company’s governance. It said they must also have either technological strength to help improve profitability or be able to help boost sales.

Frank Qu, senior partner at law firm Dentons, welcomed the clarification, saying private equity funds, mutual funds, trust plans and insurance products are unlikely strategic investors. “They should belong to the category of financial investors.”

Designating board members, supervisors and senior executives as strategic investors is “wrong by common sense,” Qu said.

On Sunday, several companies including automaker Shenyang Jinbei Automotive Co Ltd (600609.SS) and logistics firm Shanghai Ace Investment & Development Co Ltd (603329.SS) said their current placement plans may not pass the regulator’s standards.

Shenyang Jinbei planned to sell shares worth up to 20% of its capitalization to a private equity fund at a 20% discount. Shanghai Ace Investment’s plan listed its controlling shareholder and four private equity firms as strategic investors.

Other companies announcing potential delays included Dongzhu Ecological Environment Protection Co Ltd (603359.SS) and TVZone Media Co Ltd (603721.SS).

“Every company is making plans based on its own understanding of what makes a strategic investor. It’s quite chaotic,” said Ma Qiangqiang, an investor relations official at textile maker Hongda High-Tech Holding Co 002144.SZ, whose plan involves senior executives as strategic investors.

“If the regulator rejects our share sale plan, we would have no choice but terminate it,” Ma said before the CSRC’s clarification.

The CSRC did not immediately respond to a Reuters’ request for comment.

RULE CHANGES

Private share sales are a popular form of fundraising in China, where tight control of the initial public offering process makes it difficult to fund business units via spinning them off as separate listed entities.

The regulator has wrestled with share sale rules for years. It last tightened them in 2017 after finding several private placements during the 2014-15 stock market boom involved controlling shareholders investing through distant shell companies.

The relaxation last month allowed companies to sell shares equivalent to 30% of existing share capital rather than 20%, and increased the maximum number of investors in each deal to 35 from 10. It allowed shares being sold to strategic investors to be discounted by as much as 20%, from 10% previously, and halved the period during which resale is prohibited to 18 months.

Reporting by Samuel Shen in Shanghai and Kane Wu in Hong Kong; Editing by Jennifer Hughes and Christopher Cushing

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