The China Securities Regulation Committee (the CSRC) recently issued a set of trial provisions that allow shareholders of listed companies to issue exchangeable bonds. The provisions, called the Trial Provisions on the Issuance of Exchangeable Bonds by Shareholders of Listed Companies Announcement No. 41, went into effect on October 17, 2008.
Announcement No. 41 is not the CSRC’s first move to increase the funding channels available to listed companies in China. In May 2006, the CSRC issued the Measures for the Administration of the Issuance of Securities by Listed Companies, (Order No. 30) to regulate the issuance of convertible bonds and warrant bonds, and in August 2007, it issued the Provisional Measures for the Issuance of Corporate Bonds (Order No. 49) to regulate the issuance of corporate bonds in general. In accordance with Order No. 49, Announcement No. 41 introduced exchangeable bonds into the Chinese stock market on a trial basis. With these regulations, the CSRC affirms that it has provided companies with more diversified funding channels, including a greater variety of bonds that they can issue. By the end of August 2008, listed companies in China had raised RMB152.5 billion by issuing bonds.
Announcement No. 41 provides that shareholders of listed companies may apply for the CSRC’s approval to issue exchangeable bonds if they receive the recommendation of a sponsor, and if they meet certain requirements. For example, a qualified applicant must be a legal corporate entity, have a good operation record and credit rating, and be able to pay interest on the exchangeable bonds. Its net assets at the end of the latest accounting period must be no less than RMB300 million, and the total value of the company’s bonds may not exceed 40 percent of its latest net assets. In addition, a qualified applicant must not have been involved in any illicit activities that harm investors’ interests or the interest of the public, including falsifying the company’s accounts and defaulting on the company’s debts.
As for the stocks involved in the exchange, the CSRC prescribes that either the issuer’s net assets at the end of the latest period must be greater than, or equal to, RMB1.5 billion, or the weighted average of the return on net assets for the past three accounting years must be greater than, or equal to, 6 percent. At the time of the application, the stocks involved in the exchange may not be subject to any trading restrictions.
Under Announcement No. 41, the term of the exchangeable bonds must be between one and six years. The shareholders of the listed company and the company’s sponsor will determine the issuance price for the exchangeable bonds based on market research. When the exchange bonds are converted into the company’s stocks, the conversion price must be either greater than or equal to the company’s average stock price twenty trading days prior to the issuance of the prospectus or greater than or equal to the average stock price of the trading day prior to the exchange.
Announcement No. 41 stipulates that the stocks that are the subject of future conversions and their fruits serve as collateral for the exchangeable bonds to protect the bondholder’s interests. Before the issuance of the exchangeable bonds, the trustees of such bonds and the shareholders of the company must enter into a securities agreement and duly register the securities.
According to the China Center for Economic Research, “such bonds could provide shareholders with a new funding channel other than simply dumping their holdings”. This would ease the impact of heavy selling,” which has been cited as a factor that has aggravated liquidity strains in the country’s flagging stock market”.