(Yicai Global) Oct. 23 -- Proposed amendments to China's Company Law focus on adding to and retooling the rules for when firms can take back their shares, simplifying the process of share buybacks and adding standardized requirements for these for listed companies.

The amendment to the Company Law of the People's Republic of China (Draft) by the China Securities Regulatory Commission, Ministry of Justice and other related departments was submitted to the Standing Committee of the National People's Congress for deliberation yesterday.

A share repurchase occurs when a company buys back or redeems its own issued shares, which is a necessary and universal method for corporate restructuring, mergers and acquisitions, which stabilizes its stock price and optimizes the structure of its management. It is also a basic institutional arrangement in capital markets. A buyback is voluntary, whereas a redemption is compulsory.

The Company Law of the People's Republic of China enacted in 1993 carved out only two exceptions where it allowed share repurchases, including a company canceling its shares to reduce capital or merging with another firm that holds its stock.

A 2005 amendment added two more exceptions, allowing buyback of issues awarded to employees and those to shareholders who demand a company buy back their shares out of opposition to a company merger or spin-off resolution the shareholders' meeting approves. It also tacked on other provisions and requirements on the quantity of share repurchases and the corresponding decision-making process.

The current amendment to the company law changes "awarding shares to company employees" in the existing law to "using the shares for employee share ownership plans or as equity incentives" and adds the two additional exceptions of "using the shares for converting bonds issued by listed companies to convert them to stocks" and includes "necessary acts by listed companies to avert large losses and protect these companies' value while safeguarding shareholder interests."

Complex procedures that fail to satisfy the demands of long-term equity incentives and stabilize stock prices and fulfill other requirements unfortunately persist in the provisions on stock buybacks in the current law. 

"Amending and consummating relevant provisions on share repurchases in the subsisting company law is necessary to provide legal support strong enough for firms to set up long-term incentive mechanisms, improve the quality of listed companies, and above all stabilize capital markets' expectations in the current situation," said Liu Shiyu, a banker currently serving as chairman of the China Securities Regulatory Commission.

Both the quantity and the amount of money Shanghai and Shenzhen listed companies spent this year on stock buybacks exceeded those of all previous years, per relevant statistics.

By Oct. 16, 733 companies listed in the A-share market had released their repurchase plans; 508 of these had already concluded buybacks, in annual growth of 90 percent. 

The amount of money spent retrieving shares this year has reached CNY29.5 billion (USD4.3 billion) in an almost six-fold annual rise.

Editor: Ben Armour