(SHANGHAI) China's securities regulator has tightened rules on stock incentive plans for executives as it seeks to bolster corporate governance and curb abuses that favoured major shareholders while fanning market speculation.
Companies will be barred from making major announcements such as share placements, capital injections or convertible bond issues for 30 days after initiating a stock incentive scheme, the China Securities Regulatory Commission said in rules published in the official China Securities Journal yesterday.
Similarly, incentive schemes could not be launched within 30 days after a major corporate announcement. Stocks granted as incentives must also not be priced more than 50 per cent below the company's average share price during the 20 trading days prior to the announcement of the scheme.
'The new rules are designed to introduce some checks and balances and greater transparency.'
China endorsed management incentive schemes, which grant executives the right to buy a specified number of shares at a stipulated price, in 2006, but no such schemes have received regulatory approval for nearly a year.
'There were many problems in the pilot programme. Some controlling shareholders put together plans that were favourable to themselves, regardless of the interests of smaller shareholders,' said Jiang Jianrong, an analyst at Shenyin Wanguo Securities. 'The new rules are designed to introduce some checks and balances and greater transparency.'
She expected regulatory approvals of incentive schemes to resume following the adoption of the new rules. The rules require that shareholders with more than 5 per cent of a company's shares or a controlling stake get shareholder approval to receive stock incentives. Controlling shareholders are also banned from selling stocks gained through incentive schemes for 36 months.
Ms Jiang said the rules would also curb market speculation that had often accompanied the unveiling of stock incentive plans, as investors bet that executives would later make price- boosting announcements for the sake of short-term gains. 'With restrictions in place, executives' incentives would be more closely linked with a company's long-term performance,' Media reports said that the CSRC's action was taken in response to several companies' recent attempts to introduce incentive plans immediately before disclosing positive information.
'This action would benefit both listed companies and their shareholders, as it improves regulation of the market,' said Li Feng, a Galaxy Securities analyst. -- Reuters, Xinhua
This article was first published in The Business Times on May 8, 2008
