Can Exchangeable Bonds Satisfy Cash-Hungry Shareholders?

In October 17 2008, the China Securities Regulatory Commission (CSRC) promulgated a regulation on the rights of listed company shareholders to issue exchangeable bonds, namely the Trial Provisions for the Issuance of Convertible Bonds by Shareholders of Listed Companies (上市公司股东发行可交换公司债券试行规定) (Trial Provisions). The provisions allow qualified shareholders of listed companies to issue exchangeable bonds, which, pursuant to Article 1 of the Trial Provisions, are bonds issued by a shareholder of a listed company in accordance with the law, which can be exchanged into the shares of that listed company to be held by that shareholder under the agreed conditions within a certain period. Unlike convertible bonds, which are issued by listed companies and can potentially dilute the holdings of other investors, the exchangeable bonds do not increase the amount of outstanding shares but merely shift equity ownership under agreed conditions so as to help reduce the pressure on existing shareholders to sell their shares for cash.

In the long run, the introduction of exchangeable bonds will improve the structure of the capital market and help connect the equity and debt market; but according to CSRC officials and some financial commentators, this new financing tool, which was introduced in the middle of the international financial crisis amid a gloomy domestic stock market, is aimed to ease market concerns about the release and oversupply of previously locked-up shares. The objective is to make it easier for cash-hungry shareholders to raise funds.