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​China plans to permit holding of treasury stocks

Xinhua Financein CFBOND
2018-09-13 10:28

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China’s permission for A-share companies to hold treasury stocks will encourage share repurchasing at home, according to a report of the China Securities Journal on Wednesday.

Last week, the China Securities Regulatory Commission (CSRC) began to solicit public opinion on revisions to China’s Company Law, drafted in collaboration with the Ministry of Finance, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the State-owned Assets Supervision and Administration Commission of the State Council.

A highlight of these revisions is the proposal to allow A-share companies to hold treasury stocks, or shares issued and held in a public company’s treasury, for a maximum of three years.

This proposal was part of the adjustments to the share repurchase requirements in China’s existing Company Law. Under these adjustments, a public company can buy back its shares for three new purposes -- to use them in its employee stock ownership plans and stock option plans, to issue convertible bonds and warrants, and to protect corporate credit and shareholder’s interests.

Shares repurchased to these ends, instead of having to be cancelled or transferred, as is the case now, can also be held in the company’s treasury.

The share repurchase requirements in China’s existing Company Law are considered to be too stringent to incentivize share repurchasing. For example, they stipulate that stocks bought back to reward employees must be transferred within one year, while in most cases stock options offered by A-share companies are exercised two or three years after being launched.

Experts pointed out that the above revisions, which properly addresses companies’ concerns over higher financing costs, would encourage share repurchasing as a means to stabilize stock prices, improve market value management, and boost price discovery.

They also warned against possible pitfalls associated with treasury shares, which may give public companies room for speculation and market manipulation. In this regard, supervision is crucial.

As of Sept. 11, 482 A-share companies had bought back shares worth 23.96 billion yuan in 655 repurchase transactions, compared to the total of 9.2 billion yuan in 565 such deals for the whole of 2017.
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