On November 23, 2018, based on the earlier solicitation of opinions, the Shanghai Stock Exchange (SSE) officially issued the "Guidelines of the Shanghai Stock Exchange for the Information Disclosure for Distributing High Proportions of Bonus Shares or Capitalized Shares by Listed Companies" (the "Guidelines" for short). An official of the relevant department of the SSE has answered the questions about the officially issued guidelines as follows:
Q1: What are the main considerations for the "Guidelines" issued by the SSE?
A: The transformation of the undistributed profits into the bonus shares or the capital public reserves into the capitalized shares is a way for a listed company to expand its share capital. In essence, it should be implemented by a listed company to meet the demand for moderately expanding its share capital in consideration of the liquidity of its shares and other factors against the background of sustained growth in performance. However, for a long time, quite a few listed companies have seen their proportions of bonus shares or capitalized shares far exceed the companies' performance growths and their actual demand for equity expansion. In history, there were companies launching a super-high-proportion distribution plan for 30 bonus shares or capitalized shares per 10 shares. Such a high proportion was obviously incompatible with the companies' own business development, not only triggering market speculation, but also leading to excessive expansion of the companies' share capital and excessive dilution of earnings per share, which would overdraw the space for follow-up development in share capital management. Recently, some companies in the market have touched the delisting indicator with the stock price lower than the face value of RMB1, which was related to both the operational factors and the earlier large-sized expansion of share capital through distributing high proportions of bonus shares or capitalized shares.
The "Guidelines" focuses on regulating the listed companies' behaviors of distribution wit high proportions of bonus shares or capitalized shares, mainly in a bid to serve the real economy, support the listed companies in concentrating on the main business, and direct the companies to arrange returns for investors in rational ways, attract investors through excellent performance and foster the healthy culture of value investing. At the same time, it should be noted that the "Guidelines" also fully protects the normal demand of the listed companies for distribution of bonus shares or capitalized shares in the system design, as there are no special restrictions on the distribution of 5 bonus shares or capitalized shares per 10 shares.
Q2: Can you brief us on the main considerations for linking the high proportions of bonus shares or capitalized shares with the companies' performance and other indicators?
A: As the internal adjustment of equity, the distribution with high proportions of bonus shares or capitalized shares cannot directly reflect or enhance a company's performance, nor can it immediately increase the value of the listed company. On the contrary, certain interest chains tend to exist between the high proportions of bonus shares or capitalized shares and the secondary market behaviors. For example, the information collusion for manipulation, insider trading and other violations are hidden in this channel, and there are obvious motives to cover the reduction of shareholding and cashing out as well as cushion the pressure of the ban-lift of shares with sales limit. According to the past performance, despite the increases in a short period of time, the stock prices of the companies implementing the high proportions of bonus shares or capitalized shares have shown a roller-coaster-like trend with quick rising and slow falling as well as more drops than increases, and the small and medium-sized investors are very likely to be "cut like leeks". It can be said that the distribution with the high proportions of bonus shares or capitalized shares, which seriously runs counter to a company's operating performance, tends to deviate from the original purpose of equity adjustment. Although it satisfies the interests of a small number of people in the market, most investors, especially the small and medium-sized ones, may suffer losses
Therefore, the main purpose of linking the high proportions of bonus shares or capitalized shares with the companies' performance and other indicators is to ensure that the high proportions of bonus shares or capitalized shares are backed by excellent performance, so that the distribution of bonus shares or capitalized shares can return to its original objective, truly reflect a company's operating performance and actual demand for equity expansion, and steer the listed companies toward concentrating on the main business. In terms of specific institutional arrangements, it is stipulated that the high proportions of bonus shares or capitalized shares should be linked with the performance growths, and the compound growth rate of performance should not be lower than the dilution ratio of the share capital. At the same time, if the company records a loss, the performance declines significantly, or the earnings per share after the distribution of bonus shares or capitalized shares are excessively diluted, the plans for high proportions of bonus shares or capitalized shares shall not disclosed, which is also applicable during the periods before and after the major shareholders lessening their shareholding or having the ban on their held shares with sales limit lifted.
Q3: Can you tell us what to pay attention to in a company's expansion of the share capital after the release of the "Guidelines"?
A: The "Guidelines" only regulates the listed companies' behaviors of distribution of 5 or more bonus shares or capitalized shares for every 10 shares. The "Guidelines" is not applicable to the distribution below the above-mentioned proportion, and the corresponding companies can make decisions on their own according to actual needs. Historically, the proportion for separation has met on the whole the actual needs of the vast majority of listed companies in the market to expand their share capital. In the distribution of 4 bonus shares or capitalized shares per 10 shares, for example, the listed companies can independently decide to expand their share capital by 40%. In addition, from the perspective of performance growth, in fact, it is difficult for most listed companies to make the compound growth rate of performance continuously reach the percentage. Therefore, the "Guidelines" has left enough room for the companies with small share capital and real demand for capital expansion. From the perspective of practice, it is also consistent with the earlier regulatory standards of the SSE, which have been widely accepted in the market.
At the same time, the "Guidelines" also sets clauses for exceptions. For the listed companies with small-sized share capital and high-speed growth of performance, and the companies in maturity with stable performance as well as high stock prices, their reasonable demands for expanding the share capital and enhancing the liquidity have been taken into full consideration, and when making the plans for high proportions of bonus shares or capitalized shares, they can be free from the restriction of the indicators such as the performance growth rate. In terms of specific institutional arrangements, it is stipulated that the companies, which have continued to grow in the net profit in last two years and whose earnings per share have been not less than RMB1 in last three years, will have the proportions of bonus shares or capitalized shares exempted from the restrictions on the net profit growth rate, the net asset growth rate and other indicators when implementing the high proportions of bonus shares or capitalized shares. However, in order to avoid excessive dilution of earnings per share caused by over-expansion of shares, the above-mentioned companies are required to ensure that the earnings per share are not less than RMB0.5 after the distribution of bonus shares or capitalized shares.
Q4: Can you brief us on the solicitation of opinions on the "Guidelines"?
A: Considering the impact of the "Guidelines" on the companies' distribution of bonus shares or capitalized shares, the SSE publicly solicited opinions on the entire market in advance. In addition, the market concerns were interpreted through the official website of the SSE and other channels, including the regulatory logic for the high proportions of bonus shares or capitalized shares, background of formulating the "Guidelines", the main contents of the "Guidelines"，and so on. Overall, the officially issued "Guidelines" has few differences from the draft for comments, and is not beyond market expectations.
During the solicitation of opinions, we received feedback from various market participants. We also referred to the main public opinions on the media in the process of solicitation. On the whole, the market gave almost the same call for regulating the behaviors of distribution of bonus shares or capitalized shares in high proportions, and it was generally considered necessary to intensify the regulatory restrictions on the high proportions of bonus shares or capitalized shares. After receiving the opinions, the SSE carefully analyzed and properly absorbed the contents in improving the guidelines. Specifically, an opinion suggested adding the exceptional situation for the equity incentive shares with sales limit to the item "In three months before and after lifting the ban on the shares with sales limit held by relevant shareholders, the plans for high proportions of bonus shares or capitalized shares shall not be disclosed." The main consideration is that the equity incentive shares with sales limit account for small proportions in the total share capital. For the companies in great need of equity expansion, the implementation of the equity incentive plans is likely to make them unable to launch the plans for high proportions of bonus shares or capitalized shares for consecutive years, which may also affect the intention of the listed companies to implement the equity incentives. The above-mentioned opinion is rational to some extent and has been absorbed and adopted.
In the solicitation of opinions, there are also opinions that stricter identification and regulatory measures should be adopted for the high proportions of bonus shares or capitalized shares. For example, the proportions close to the identification standard should also be included in the scope of regulatory constraints. In this regard, our opinion is that the "Guidelines" has relatively adequately balanced the positive and negative effects of the distribution of bonus shares and capitalized shares, and too strict rules may limit the listed companies' space for equity management, and adversely affect their development and capital operation. At the same time, from the perspective of practice, after several years of regulatory guidance, the participants in the market have had a clearer understanding of the essence of high proportions of bonus shares or capitalized shares, and the SSE-listed companies' distribution of high proportions of bonus shares or capitalized shares has cooled down significantly, as only 10 companies implemented the high proportions of bonus shares or capitalized shares during the announcement of the annual reports for 2017, indicating the consensus on the definition and regulatory logic for the high proportions of bonus shares or capitalized shares at present.
