Such securities are seen as providing a much-needed new channel for companies to raise funds. This is especially important for Chinese lenders, which are required to maintain high capital adequacy ratios since the implementation of Basel III rules.
Last Friday, the CSRC published a consultation paper regarding the rules and regulations for the issuance of preferred shares, allowing companies to issue such paper for the first time since the 1980s. The consultation will finish at the end of this month and the new rules will be implemented from January.
While the guidelines are not specific to the financial sector, listed banks, including Bank of China, Shanghai Pudong Development Bank and Agricultural Bank of China, are expected to be the first to offer preferred shares, while insurers and power companies are expected to follow.
According to the draft rules, both listed and unlisted companies can issue preferred shares, if they meet certain requirements.
Three types of listed companies can issue preferred shares. They have to be constituents of the SSE 50 Index, they have to issue preferred shares to acquire or merge with other listed companies and they have to issue preferred shares to repurchase common shares.
The preferred shares issued to the public should be cumulative and should pay a fixed dividend. Commercial banks that will use the proceeds to replenish capital are allowed to issue non-cumulative preferred shares.
Issuance of preferred shares will be limited to 50% of common stock and 50% of net assets, and are not allowed to be converted into common shares until 36 months after issued.
Apart from public issuance, listed companies can also issue preferred shares privately. Such shares, however, can only be sold to less than 200 investors.
Unlisted companies and domestically registered, but overseas listed companies, are also allowed to issue preferred shares, but only through private placement to less than 200 investors. Such shares can be issued on the domestic over-the-counter stock market, also known as the new “third board”.
According to the draft rules, qualified investors for preferred shares would include the approved financial institutions and their issued wealth management products, qualified foreign institutional investors, or QFIIs, and renminbi QFIIs, enterprises, partnership enterprises and individual investors with assets of at least Rmb5m (US$823,390) in their investment accounts.
