CSRC to nip stock split trend in bud
The China Securities Regulatory Commission said it will crack down on any speculative or insider trading in shares related to anticipated announcements about stock splits.
CSRC Chairman Liu Shiyu remarked earlier this month that listed companies should use stock splits for the right reasons, else they would become targets of regulatory scrutiny.
In recent months, as many as nine A-share companies applied to the CSRC to split their stocks, promising to issue 30 shares for each 10 shares held by shareholders.
The CSRC said in March it will regulate any tendency among companies to overuse stock splits. Companies should focus on their business performance and make full disclosures as to why they are resorting to stock splits.
Stock split is a practice where a listed company splits an existing share into two or more parts, thus increasing the number of common shares but lowering the share price proportionately.
According to Wind, an information service provider, more than 200 listed companies released plans to split their stocks by April 8.
Usually, a stock split follows a share price rise to very high levels, beyond the prices of shares of similar companies in a sector. It is done to make a company’s stock seem more affordable to small investors.
The underlying value of the company concerned does not change as the market capitalization remains unaltered.
Existing shareholders get more shares but with no discernible benefits.
But typically, speculative investors drive up the stock concerned, in anticipation of a price rise on the back of expected demand from small investors. Zhongtai Securities said in a note the CSRC’s stated stance on stock splits will likely discourage the practice this year.
The Shanghai and Shenzhen bourses have already sought to scrutinize many companies that sought to split their stocks.
Some A-share companies such as Hubei Kailong Chemical Group Co Ltd and Holitech Technology Co Ltd are revising their stock-split plans.
“In China, many speculators have been buying some A shares, expecting their prices to rise (in the run-up to stock split). Major shareholders of the listed companies tend to take advantage of the opportunity to decrease their own shareholding,” said a source at China Fortune Securities who declined to be named.
The source at China Fortune Securities said that most stock splits have no direct relation to the business performance of the companies concerned, nor do they improve their valuation.
The prominent names among companies that sought to split their stocks are: Hubei Kailong, Beijing Tongtech Co Ltd, Holitech, Kee Ever Bright Decorative Technology Co Ltd and Shenzhen Ysstech Info-Tech Co Ltd.
When news of their stock split plans emerged, shares of Hubei Kailong and Beijing Tongtech climbed by their daily limit for two days.