Banking & Finance

Selling up

How major shareholders are explaining their stock sales

Claypot w

Zhongchao’s dividend: a teapot

“Living together but not married” was how one media outlet described the new partnership of China Unicom and China Telecom (see WiC310). But shareholders in a much smaller firm have found that marital affairs are a more genuine concern.

Last month A-share listed Shanghai U9 Game announced that its second and third largest stockholders had married, thereby (figuratively) marrying too their shares in the company.

The newlyweds then announced that as a result of this ‘stock marriage’ they were seeking to sell a portion of their collective holding, a move that put downward pressure on the stock.

The happy couple isn’t alone in wanting to dispose of some of their shares at a time when stock sales have been heavily restricted by the Chinese authorities. Other large shareholders have been coming up with a host of interesting excuses for why they now need to offload their stakes.

In late January ChineseOnline announced that one of its stockholders was seeking to sell more than two million shares. The reason he gave – to “improve my lifestyle”– was not exactly the usual commercial language. On the day of the announcement the company’s stock was trading at Rmb128.98, meaning that the sale would have returned over Rmb250 million ($38 million).

“What sort of lavish lifestyle is this?” Caijing magazine quoted one incredulous observer as saying of the rationale for downsizing the stake.

On January 8 the six-month trading ban imposed upon ‘major shareholders’ in the Chinese market (‘major’ meaning holdings of more than 5%) expired, but it was swiftly replaced by new restrictions.

The new rules came immediately into action; they limit sales by major shareholders to 1% of the company’s equity, and they ask for details about the intended sales to be provided 15 days in advance.

“Such a move could discourage such sales by giving other investors a chance to sell out first, lowering the price,” the Financial Times reasoned of the deterrent thinking behind the move.

The new rules have also been encouraging some shareholders to come up with florid motives for pursuing their disposals.

Other reasons for some of the sales in recent weeks have included the need to raise cash for ‘self development’ and to pay ‘tuition fees’.

As a Chengdu-based investment advisor quipped: “When the likes of ‘improving my lifestyle’ and ‘covering my child’s tuition fees’ become reasons [for major shareholders selling stocks], how much longer will average [i.e. much smaller] shareholders continue to trust the listed companies?”

Elsewhere on the A-share market companies have been trying to keep their shareholders sweet with ‘alternative dividends’.

To celebrate its anniversary as a listed entity, Jiangsu Zhongchao Holdings, a maker of cables and electric wiring, announced that it was going to spend Rmb5 million on purple-clay teapots and give them to investors holding more than 3,000 shares. Media sources were quick to point out that the teapots were bought from its own subsidiary company.

According to Shanghai Securities News, Zhongchao admits that its teapot giveaway was in part a ruse to garner customers for its pottery venture.

Nor is it the first to practice such techniques: in 2013 Quantum High-Tech gave shareholders gifts of Turtle Jelly (a traditional Chinese medicine) made by one of its own subsidiaries, while Australian beef and sesame milk have also been distributed as dividends by Chinese companies that have interests in the same products.

Shanghai Securities News strongly disapproves of the practice, arguing that investors want financial returns, not ‘exotic dividends’, while China Business has been making the obvious point that the costs of the gift-giving come out of company profits.

“Ultimately it’s the shareholders that end up footing the bill for this free lunch,” it reminded.

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