China Securities Regulatory Commission Optimizes Convertible Bond Rules: Curb "Speculation" And Guard Against The Risk Of Forced Redemption

In the face of the hot convertible bonds, the regulatory authorities began to seek to optimize the relevant rules and regulations to curb the inflation of convertible bonds from the source.

On October 23, the China Securities Regulatory Commission drafted and formulated the measures for the administration of convertible corporate bonds (Draft for comments) (hereinafter referred to as the draft for Soliciting Opinions) and its explanations, and solicited opinions from the public.

On the same day, the Shanghai and Shenzhen stock exchanges also successively issued papers to continuously focus on monitoring the convertible bonds with abnormal rise and fall in the market, and took timely regulatory measures. Earlier, the daily increase of more than 170%, the turnover rate of more than 20 times, and the turnover of more than 10 billion yuan received a letter of concern from the Shenzhen Stock Exchange, which was also regarded as the beginning of the regulatory intervention in this round of soaring convertible bonds.

China Securities Regulatory Commission (CSRC) said that convertible bonds, as a kind of hybrid securities with both "stock nature" and "debt nature", have witnessed a substantial increase in the issuance scale in recent years, which is one of the important channels for enterprises to refinance. However, the recent phenomenon of individual convertible bonds being over hyped, rising and falling sharply has fully exposed the problem of mismatch between system rules and product attributes.

Let convertible bonds have rules to follow

Yang Weixiang, chief analyst of fixed income of Kaiyuan securities, said that the main reason for the boom in some convertible bonds in this round is that the stock market lacks the main line of investment, while the capital is relatively abundant. With the help of hot topics, some idle funds pour into the convertible bond market with t + 0 trading and no limit of rise and fall, and push up small-scale convertible bonds.

According to the relevant person in charge of the CSRC, at present, there are no rules specifically regulating convertible bonds at the regulatory level, and no special trading rules have been formulated for convertible bonds. The trading rules of ordinary bonds are simply applied, and the trading looseness is far greater than that of stock trading. At the same time, the inherent defect of convertible bonds is that "with the continuous conversion of shares, the scale of bond existence gradually shrinks, so it is easy to be hyped or manipulated", which is superimposed with the above loose trading rules, resulting in some convertible bonds being over hyped.

In view of the phenomenon that some convertible bonds have been stir fried, the draft focuses on improving the transaction of convertible bonds.

First of all, the draft for comments focuses on improving the trading system, requiring the securities trading places to formulate trading rules according to the risks and characteristics of convertible bonds, so as to prevent and curb excessive speculation. In particular, it is necessary to reevaluate and improve the existing trading rules in combination with the "equity nature" of convertible bonds and the inherent defects of small convertible bonds that are easy to be hyped.

In addition, in terms of investor suitability system. Market participants said that in view of the high speculative, volatility and risk of convertible bonds, and this feature will be further amplified with the fluctuation of the stock price, some convertible bonds become "high-risk" products, which do not match the investment experience and risk tolerance of retail investors.

Therefore, the draft requires that the securities exchange should formulate an investor suitability management system, especially to adapt to the investor suitability requirements of the board where the principal shares are located. At the same time, the securities company is required to check and evaluate whether the customers meet the investor suitability, and guide the investors to participate in the convertible bond trading rationally.

In addition, the draft also makes it clear that securities exchanges should strengthen risk monitoring, establish a cross securities monitoring mechanism between convertible bonds and principal stocks, and formulate targeted abnormal volatility indicators. In case of abnormal fluctuation in convertible bond trading, the securities trading place may require the issuer to check, disclose the announcement of abnormal fluctuation, or take temporary suspension measures according to the business rules.

Guard against the risk of forced redemption of convertible bonds

As for the risk of "high hanging" forced redemption, the draft also takes precautions from the rules.

The so-called forced redemption refers to that the issuer has the right to redeem the bond in advance according to the face value and interest of the bond after the positive share price is continuously higher than a certain proportion of the agreed conversion price and lasts for a certain period of time, which often brings about greater market risk.

Bohai Securities analyst Zhu linning said that there are generally two conditions for mandatory Redemption: one is that for 30 consecutive trading days, at least 15 trading days, the stock price has risen to 130% of the transferred share price, and the other is that the circulation quantity is less than 30 million yuan. Therefore, we should be alert to the convertible bonds with high price and low circulation.

Since this year, a total of 98 convertible bonds have entered the period of stock conversion, among which 40 companies have issued the announcement of "no early redemption of convertible bonds". Some companies may issue a notice not to redeem the convertible bonds in advance in the early stage, but in the later stage, the mandatory redemption announcement will be issued. Zhu linning thinks that the risk should be paid attention to for individual bonds that meet the mandatory redemption conditions.

In order to prevent the above-mentioned transaction risks, the draft for solicitation of opinions stipulates that if the redemption conditions are expected to be met, the issuer shall disclose them in time before the redemption conditions are met, so as to fully remind the market of the risks. If the issuer decides to redeem, it shall fully disclose the transaction of convertible bonds of the company by its actual controller, controlling shareholder, shareholders holding more than 5% shares, directors, supervisors and senior managers.

If the issuer decides not to redeem, it may not exercise the redemption right again within the period specified by the exchange. At the same time, the issuer is required to abide by the principle of good faith when deciding whether to exercise the redemption right, and shall not mislead investors or damage the legitimate rights and interests of bondholders. The sponsor shall continuously supervise whether the exercise of the redemption right of the issuer is appropriate.

It is worth mentioning that at present, there are some cases in the market that the redemption and resale terms stipulated in the prospectus of convertible bonds are obviously not equal, which is also concerned by the regulatory authorities.

If the issuer can exercise the foreclosure right only 15 trading days after the price of the principal shares is higher than the conversion price, and the holder can exercise the right of repurchase only after 30 trading days when the price of the principal shares is lower than the price of the converted shares. Or the number of times the issuer can exercise the foreclosure right is not limited, and the holder's right to sell back can only be exercised once a year.

In order to protect the legitimate rights and interests of investors, the draft requires that the design of redemption and resale terms should reflect the principle of equal rights and obligations. The trigger conditions, exercise period, number of exercises and interest calculation methods of redemption and resale should be equal and consistent, and the rights of issuers or bondholders should not be unilaterally expanded. Sponsors and law firms should Check the fairness of the provisions and express opinions.

"Investment in convertible bonds still needs to pay attention to the fundamentals of listed companies, the positive stock trend and the intrinsic value of convertible bonds. For the convertible bonds with high premium rate, high turnover rate and high closing price, the risk should be avoided in time. " Zhu linning said.

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