Part III: Illegal Information Disclosure
Case 2: Guard against “High Stock Dividend” Promised by a Listed Company for Mixed Motives
Source: China Securities Regulatory Commission www.csrc.gov.cn
As one of the hotspot themes receiving much attention from the market, “high stock dividend” is frequently sought after by the medium and small investors. In the A-share market, some listed companies announce “high stock dividend” programs such as “20 shares for every 10 shares held” or “30 shares for every 10 shares held” “generously” before disclosure of their semiannual reports or annual reports, by these means, they significantly raise their share prices thus to excite the investors’ interest, and make “high stock dividend” into a speculation theme or “panacea” for their substantial shareholders or insiders to reduce shares held.
Company X ever made a combined trick of “‘high stock dividend’+‘cash-out through reduction in shares’+‘big pre-losing’”, which attracted and caused some unwitting investors to pay heavily for speculation of the share price and improper “market value management” of company X. At the beginning of 2015, company X issued its “high stock dividend” pre-arranged plan, person Y – the chairman and president, as well as shareholder of company X, proposed and approved the “high stock dividend” profit distribution plan of year 2014, viz., “conversion of every 10 shares held into 20 shares”, together with other two shareholders of the company on the grounds of “positively benefitting the shareholders and sharing the business performance of the future development of the company with all the shareholders in consideration of the actual business performance of the company in 2014”. On the same day, the above 3 shareholders jointly disclosed their plans for reduction in shares and cashed out for more than RMB 2 billion Yuan. What was noticeable was that the share price of the company rose by nearly 40% before release of the “high stock dividend” information.
Nevertheless, only a few days later, company X made an announcement for pre-losing of RMB 800 million Yuan and gave an early warning at the same time. Because company X suffered from loss in 2013, if it suffered from loss in 2014 successively, it might receive a delisting risk alert on its shares. Just like a stone thrown into the water, the unpredictable big loss of this listed company which was contrary to the profit prediction shocked the investors in the market, and its share price fluctuated greatly. This case has become a typical case of misleading and bringing losses to the investors with “high stock dividend”. According to the rough statistics made by the layers, up to now, about 400 investors have filed their lawsuits against company X with claim amount of RMB 80 million to RMB 100 million Yuan.
Person Y – a shareholder of company X, served as the chairman and president of company X concurrently. When raising and considering the relevant profit distribution proposal such as “high stock dividend”, he should know or actively check the operation situations of the company, and determine whether the profit distribution proposal as well as relevant disclosed items are in line with the actual operation situations of the company accordingly. In fact, the relevant disclosed items in the “high stock dividend” pre-arranged plan released by company X were significantly contrary to the pre-losing conditions announced by the company a few days later, which greatly affected the investors to make decisions. Person Y didn’t perform his / her due diligence, and its above behavior was in violation of the relevant provisions stipulated in the Rules for Listing of Stocks of Shanghai Stock Exchange, and Selection & Appointment and Conduct Guidelines for Directors of Listed Companies of Shanghai Stock Exchange. Shanghai Stock Exchange publically censured person Y, and criticized other two shareholders and directors in office through public notice.
In addition, behind the “high stock dividend”, there are likely illegal conducts such as insider transaction and market manipulation taking place concurrently. China Securities Regulatory Commission ever made administrative punishment including fine, confiscation of illegal gains, warning and prohibited access to the securities market on company X for its illegal insider transaction of collaborating in reduction of shares with “high stock dividend” when the relevant executives of company X knew the actual financial situations of the company.
In the market, really some listed company have “impure motives”, such as collaborating the shareholders in reduction of shares with “high stock dividend”, and desterilization of non-tradable shares, there are also some listed companies which forcibly execute “high stock dividend” programs even though they suffer from losses or even deterioration in performance. For this reason, in order to protect the investors’ right to know, the regulatory authority has fully intensified its front-line supervision on “high stock dividend”, and strictly exercised approval examination and approval on information disclosure based on the “three-in-one” supervision mode of supervision by category, process supervision and inquiring the basic conditions for the companies which have disclosed “high stock dividend” pre-arranged plans.
For the medium and small investors, in order not to being trapped by “high stock dividend”, they shall well and deeply understand the nature of “high stock dividend”. Virtually, “high stock dividend” is the internal structural adjustment for shareholders’ equity, with “high stock dividend”, the total equity of the company increases, but the return on equity doesn’t change, profitability of the company doesn’t improve substantially, so the equity of the investors will not increase because of “high stock dividend”. The investors shall be warned of not being baffled by this kind of “digital game”.
Furthermore, “high stock dividend” not in line with the performance often conceals speculation of share price and reduction of shareholders’ shares. When a listed company announces its “high stock dividend” pre-arranged plan officially, the investors shall attach great attention to the real purpose behind “high stock dividend” made by the company, make comprehensive consideration about the development strategy and operation performance, and so on, of the company, analyze rationality of “high stock dividend” and don’t follow suit blindly.
This article is excerpted from “Risk Warning and Prevention for Investors” - Cases of “Protecting Investors • Know Rules, Identify Risks - Guard against “High Stock Dividend” Promised by a Listed Company for Mixed Motives” published on the official website of China Securities Regulatory Commission.