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Recently, the China Securities Regulatory Commission (CSRC) specifically issued an action plan to make comprehensive arrangements for improving the quality of the listed companies in the capital market. The Shanghai Stock Exchange (SSE) will focus on the plan, pool the wisdom and efforts of all market participants, work together in a multi-pronged manner, and guide the listed companies in concentrating on their main businesses, consolidating their operations and improving their quality. Recently, with the year-end rush transactions of the listed companies on the rise, the SSE’s regulators for companies have made relevant efforts in supervision, aiming to eliminate the false and retain the true, enhance the quality of the listed companies, and maintain the sound ecology and the healthy development of the capital market.
1. Insisting on the essence of transaction, and carrying out classified regulation in a practical and realistic manner
There were mainly two types of rush transactions at the end of the year. One type was the shell-protective trading, where the measures such as asset transactions and adjustment of accounting classification were taken to avoid delisting. The other type was the cash-out transactions, generally in the form of buying the assets of the related parties in cash, which were suspected of transferring benefits to the related parties in disguise. Despite the different purposes and forms, both the two types of transactions were characterized by the rush implementation at the end of the year. In this regard, the SSE’s regulators for companies have analyzed and summarized the situations to make relevant efforts in classified regulation. The transactions characterized by the lack of commercial substance as well as artificial fabrication and manipulation were strictly regulated according to laws and rules; adequate space was provided for the transactions that had fairly priced assets and would benefit the long-term development of the companies’ main businesses, so as to support the companies in getting out of the difficulties and strengthening the main businesses.
In the transactions for the purpose of shell protection, the attempts were made mainly to "tailor" the deals to avoid the circumstances of delisting risk such as negative net assets, continuous losses in net profit, and less than RMB10 million in operating income. The specific forms included achieving disposal gains through selling various assets such as land, real estate and equity, purchasing subsidiaries to increase consolidated assets or profits, recognizing revaluation gains through investment in taking a stake with assets, and adjusting profits through changes in accounting policies and accounting estimates. For such transactions, it was necessary to consider whether there was the commercial substance, and the focus was on whether the assets were priced fairly, whether there was a potential related connection with the counterparty, whether there were other interest arrangements, and whether the corresponding accounting treatment met the requirements of the standard, etc.
Most of the transactions aimed at cashing out were related transactions, behind which were “the company’s controlling shareholder, actual controller, board of directors, supervisory board and senior management team members”, suspected of encroaching on the interests of the listed companies in disguise. The main feature was the cash outflow of the listed companies. The typical method was to purchase assets from related parties such as the controlling shareholder, and at the same time, there were also the modes of possibly occupying, utilizing and acquiring the resources of the listing companies in disguise such as providing guarantees for related parties, increasing capital in the related parties, co-investing with related parties, and selling high-quality assets to related parties. For this type of transactions, the focus was on paying attention to the equity of the transaction, the fairness of the pricing, and whether there was any improper transfer of benefits. Specifically, it was necessary to look at the actual value of the assets, learn about whether the controlling shareholder had credit problems and liquidity difficulties, as well as watch out for the potential related-party transactions in an unrelated manner.
2. Making effective efforts in in-process regulation to avoid irreparable losses for listed companies
With regard to the rush transactions, the SSE has always implemented the requirements of the CSRC for timely discovering, curbing and investigating in the regular regulation, attaching special importance to the in-process regulation to avoid irreparable losses. Judging from the previous practice, once the rush transaction was completed, the large-amount capital outflows could not be recovered, the embedded non-performing assets would be a lingering burden, and it was difficult to eliminate the zombie company with the shell retained. As a result, the situations not only harmed the interests of the listed companies, but also adversely affected the market order.
For the abovementioned reasons, the SSE’s regulators for companies have strived to bring the role of in-process regulation into full play, integrated the measures such as inquiry through letters, regulatory talks with intermediaries, request for examination and disciplinary action, implemented the regulation in a multi-pronged manner, stepped up the accountability, and tried to fully reveal the essence of the transactions by combining the regulatory and market constraints as well as stop the misconduct in a timely manner.
In fact, the regulation over the rush transactions has achieved initial results. So far, there have been more than 20 cases of suspected shell-protective transactions and more than 10 cases of suspected cashing-out transactions. Because of the open market constraints, the companies have taken the initiative to cancel or adjust some apparently improper rush transactions. Specifically, a certain company had planned to increase capital in a subordinate enterprise of the actual controller, but the underlying business was significantly different from the company's main business, with the follow-up proposed projects involving cross-border investments worth about RMB10 billion. With multiple rounds of regulatory inquiry, the problems and the risks in the transaction surfaced, and the company finally decided to cancel the plan for capital increase. In addition, some company had intended to change the accounting method on the excuse of being trusted to participate in the small-amount voting rights and the change of the positions of the former directors, and then confirm the investment incomes to achieve the goal of turning losses into gains. However, the actual situations showed that the company's influence on the underlying assets was not changed substantially. With regulatory inquiries and talks with the intermediaries, the company finally canceled the accounting changes.
3. Deepening the regulatory services and helping the listed companies out of difficulties
Recently, the problems and risks of the listed companies have been concentrated, and some companies have encountered difficulties. Actually, there were the effects of external uncertainties such as macro market fluctuations and industry cycles and changes, as well as the impacts of the internal factors such as the "key minority" of the listed companies including controlling shareholders, actual controllers, directors, supervisors and executives failing to diligently perform their duties. In the process of regulating the rush transactions, the SSE has adhered to “focusing on listed companies who perform very well and not well, and improving the companies of the middle level”, and attached equal importance to regulation and service. While carrying out the necessary regulation in accordance with the law and rules, the SSE has supported the companies characterized by weakness in main businesses as well as standardized operations in introducing high-quality assets, consolidating their main businesses and enhance their capacity for continuous operations; the SSE has also offered policy guidance and assistance to the companies whose controlling shareholders were indeed in difficulty.
Since the beginning of this year, with the initiatives of “inviting” and “visiting”, the SSE’s regulators for companies have learned about the actual difficulties and needs of the listed companies and listened to opinions and suggestions through multiple channels and means such as visiting the local State-owned Assets Supervision and Administration Commissions and holding seminars for the listed companies in different industries, vigorously designing relevant policies and measures and supporting the companies in resolving the operational difficulties. The SSE has organized a number of special training seminars on pledges to build the bailout platforms for the controlling shareholders with a high percentage of stock pledges, so as to defuse potential risks. In terms of training services, the SSE has expanded the coverage of the trainees to the controlling shareholders and actual controllers, so as to focus on the key of the "key minority", providing interpretations and suggestions, urging them to be diligent in duties, honest and trustworthy, and effectively directing and consolidating the foundation for the listed companies to concentrate on the main businesses and improve the quality.
In the process of improving the regulation and strengthening the services, the fundamental goal is to push the listed companies to improve the quality. The SSE will continue to implement the arrangements and requirements of the CSRC, keep in mind the mission of regulation, effectively meet the requirement for people-oriented regulation of the capital market, further guide the listed companies and the "senior executives" in abiding by the rules and following the right path, and urge the companies to focus on their main businesses and regulate their operations, so as to consolidate the foundation for the healthy development of the capital market.
