China’s National People’s Congress (NPC) is revising the country’s law on share repurchase (or stock buyback) to adapt it to the current market environment, Xinhua News Agency reported on Monday.
The new law will help build up companies’ long-term incentive mechanisms, improve companies’ capabilities and stabilize investors’ expectations, said the China Securities Regulatory Commission.
Listed companies found that the range of the allowable share repurchase volume is rather small, which means it is hard to meet their demand in practice; the implementation of the existing share repurchase law was complicated and the holding period for a stock buyback is short.
The process for the application of the amended share repurchase law will be simplified and standardized while the upper limit for the number of stock buybacks will be expanded with their holding period being extended, according to people close to the matter.
Share repurchase refers to a company buying back its stock from the marketplace. Analysts said China’s current share repurchase law is stringent and the amendment will bring a positive influence on China’s A-share market by optimizing corporate governance and stabilizing stock prices.
Share repurchase normally occurs when a company’s stock has slumped, and the management feels their shares are undervalued. This strategy is used to reduce the number of outstanding shares while at the same time the value of per share will improve.
There are around 2,169 companies listed in the Shanghai and Shenzhen stock markets who have been conducting share repurchase schemes since 2014, according to data from the China Securities Regulatory Commission.