On October 9, 2008, after a period of public consultation, the China Securities Regulatory Commission (the "CSRC") promulgated the Supplementary Provisions on Share Repurchase through Centralized Price Competition by Listed Company (the "Provisions") to regulate share repurchases through centralized price competition ("Share Repurchases"). The Provisions supplement and repeal some of the existing regulations on Share Repurchases which were enacted in 2005 by the CSRC (the "2005 Measures").
One of the challenges under the 2005 Measures was that a listed company could not implement a Share Repurchase until it received a no-objection letter from the CSRC. The Provisions aim to relax this requirement. Now a listed company is required to announce the shareholders’ resolutions approving the repurchase, submit relevant materials to the CSRC and the relevant stock exchange for filing, and announce the repurchase report. Although the Provisions remain silent regarding no-objection letters, based on our understanding, a no-objection letter will no longer be required.
Note, however, that certain provisions of the 2005 Measures continue to regulate Share Repurchases. For example, the repurchase report must adhere to the 2005 Measures (and the relevant exchange guidelines), which require, among other items, price range for the repurchase, class and number of shares to be repurchased and management analysis of the impact of the repurchase on the operation, finance, and future development of the company. Additionally, pursuant to the 2005 Measures, listed companies continue to be required to provide an announcement of the legal opinion simultaneous with the announcement of the repurchase report.
In an earlier draft of the Provisions, a listed company is not permitted to declare or pay cash dividends during the period beginning on the date of the announcement of the repurchase plan and concluding on 30 days after the repurchase. Apparently this restriction was not favorably received by the public and thus was not included in the final draft.
The Provisions are meant to "improve the mechanism of share repurchase, which could help maintain investor confidence and stabilize the stock market when equities were undervalued." It is too early to see the impact of these Provisions but it is clear that with the global financial crisis in place, these Provisions alone will not be able to boost investors’ confidence and revert the downward trend of the Chinese stock markets.