(Yicai Global) Aug. 24 -- Following two consecutive days of its Shanghai-listed shares hitting the down limit after its market debut, China Telecom said today that it has been following the stock price trend and will authorize the lead underwriter to execute the ‘over-allotment option’, namely ‘the green-shoe mechanism’, if the shares fall below the issue price, Chinanews.com reported.

Shares of China Telecom [SHA: 601728] slumped 10 percent to hit the daily lower limit for the second straight day, closing at CNY4.95 (76.4 US cents) today, wiping more than CNY90 billion (USD13.9 billion) off its market value. The Shanghai Stock Exchange Composite Index, however, ended up 1.07 percent.

The mobile carrier’s stock price, which surged nearly 35 percent on the first day of trading on Friday, will fall below its issuing price of CNY4.53, if the decline rate exceeds 8.5 percent tomorrow.

The Chinanews.com report quoted a person from China Telecom’s investor relations department as saying that the company’s upbeat first-half results suggest the carrier has no operational issues. The market is a game of long- and short-selling, he said, hoping that investors will look rationally at the market trend.

“China Telecom will take action if its shares fall below the issue price and the company also has a series of plans and measures to stabilize the stock price in the A-share market, including increase in major shareholders’ stake and a buyback of shares,” the insider added.

Since A-share listing rules require that the issue price should not be lower than a company’s net assets per share, there is a large gap between China Telecom’s issue price of and its stock price in Hong Kong, which is only about half of its issue price.

Therefore, China Telecom adopted the ‘over-allotment option’, also known as ‘the green-shoe mechanism’, in its Shanghai listing. This means that within 30 natural days after the listing if the stock falls below the issue price, the underwriters will buy shares for the funds raised from the over-allotment option to protect investors’ rights and interests.

China Telecom posted CNY17.7 billion (USD2.7 billion) in net profit in the first half, an annual rise of 27.2 percent, as per the state-backed carrier’s semi-annual report released recently.

Editor: Peter Thomas