IPO rules buoy State companies

Stock investors in a securities trading office in Beijing. Unlocking non-tradable shares for some companies was followed by new share transfer rules. Asianewsphoto

Several State-owned listed companies now able to unlock the price of their initial public offerings, or IPOs, generally are buoyed by news that the national pension fund will take over part of their shares and hold them for three years, experts said.

On June 19, the Ministry of Finance, together with the China Securities Regulatory Commission, said that State-owned firms seeking IPOs on the mainland must contribute shares to help close a pension fund gap created by a rising number of retirees in China.

According to the regulations, companies that sold shares after the market structure reform measures in 2005, and those who do so in the future, must transfer State-owned shares equivalent to 10 percent of their IPOs to the National Social Security Fund (NSSF), which would extend the lock-up period by another three years.

The measure applied to 131 State-controlled enterprises and involved 826 State-owned shareholders. About 8.39 billion shares will be transferred with a market capitalization estimated at 63.9 billion yuan.

Among the 131 companies, share prices were unlocked for 11 in late June. Those 11 included China Construction Bank, China Shenhua Energy Co, China National Petroleum Corp, China Shipping Container Lines Co, China Pacific Insurance (Group) Co and China National Coal Group Corp.

Industry analysts said these companies were likely to see their shares rise, since the national pension share transfers would extend the lock-up period to stabilize the stock market and boost investor confidence.

Unlocking the prices will apply to China's A shares market for non-tradable shares in 2010.

That includes China Shenhua Energy Co, which can unlock 14.69 billion of non-tradable shares as tradable ones.

In 2011, China National Coal Group Corp can unlock 7.62 billion of non-tradable shares.

"The extended lock-up period can help alleviate panic in the wake of unlocking non-tradable shares," said Zhao Xijun, a finance professor at Renmin University.

"In addition, the pension fund is not likely to sell shares in large scale after three years, which can boost investors' confidence," Zhao said.

Since June 22, the first trading date after the new policy was announced, six industry heavyweights such as China Construction Bank and China Shenhua Energy Co watched their shares rise during the following week. China Pacific Insurance (Group) Co surged about 14.11 percent.

As the official website CCTV.com reported, the regulations required the State-owned shares to be transferred at the issuance price. Otherwise, the national pension fund would suffer potential losses if issuance prices were unlocked.

Industry experts said the shares that were below their issuance price were likely to keep on rising in July and might recover their IPO price.

While the State-owned listed companies are backed by the share transfer rules, many State-owned venture capital (VC) firms are more vulnerable, experts said.

It will be hard to make a profit once the shares are transferred to the pension fund, they said.

Industry experts called on the government to issue more information about the share transfer rules and protect the interests of the VC firms.

"The share transfer rules should consider protecting the State-owned venture capital firms and industry funds," said Wang Shouren, secretary-general of Shenzhen Venture Capital Association.

The government allowed companies to submit comments on the new regulations by the end of July.

So far, Lihe Co has been the only company to submit comments.

Lihe's subsidiary, Zhuhai Tsinghua Science Park Venture Capital Co, has invested in the Shenzhen Topband Electronics & Technology Co, which became one of the 131 listed companies told to transfer shares to the pension fund.

As the VC's parent company, Lihe officials said the share transfer rules might be unfair for its other shareholders.

Lihe officials also said the company had mixed ownership, which could make the share transfer too complicated.

According to the newspaper, Securities Times, Lihe received approval to be exempted from transferring shares to the pension fund.

Meanwhile, some Chinese media outlets reported that the stock transfers might threaten State shareholders' dominant positions in some of the companies.

For example, Bank of Nanjing, a listed regional lender, could see its current largest owner, the State-owned Nanjing Zijin Investment Co, concede its No. 1 position to BNP Paribas, the lender's second-largest shareholder, after the 10 percent share transfer.

Nanjing Zijin Investment Co now holds 13.35 percent of the bank's shares, compared to the 12.61 percent owned by BNP Paribas.

Similarly, another regional lender, Bank of Ningbo, might also see a foreign financial institution become its largest shareholder, according to media reports.

However, the Bank of Ningbo does not anticipate a change in the status of its shareholders.

"Share transfer is not a simple reduction of stock held by state owners. There should be ways to keep shareholders' positions intact," the bank said in a statement.

According to the new regulations, if State-owned shareholders want to maintain a dominant position in certain companies, they can submit cash or dividends with the equivalent value of 10 percent of IPO stocks to the pension fund.

(China Daily 07/06/2009 page4)