At the end of April, a list was released of the 30th group of companies, which were to carry out an overall stock reform. It had been exactly a year since the reform of stock markets in Shenzhen and Shanghai started. Until then, the overall stock value of stock-reformed companies occupied 70% of the market. The proportion for Shenzhen stock market was almost 80%.
Some senior management at the listed companies say this reform is actually a process of re-distribution of wealth within the Chinese security market.
A Victory for Small Shareholders
In the past, due to the shareholder structure, larger shareholders who controlled the non-circulating stocks did not care much about medium and small shareholders who held circulating shares. However, when promises were made to compensate for the historical costs of the shareholders who own shares in circulation, there was an unprecedented upswing in public consciousness. Any behavior that neglects the interests of small shareholders would cost big shareholders of non-circulating shares dearly.
Sany Heavy Industry Company (600031.SH) is the first company to have paid an arm and a leg for its inadvertent message to holders of circulating shares.
Last April, as one of the first group of experimental private enterprises engaged in stock reform, Sany took the lead in stock reform with a scheme to reform shareholder-structure in terms of compensation. It intended to provide compensation totaling 18 million shares and RMB48 million (US$6 million) in cash for circulating shareholders. Later, as a fierce battle was waged between the circulating and non-circulating shareholders, Sany president Liang Wengen regretfully commented, “Small pigs should sit silently while big pigs are eating.” The “pig theory” outraged circulating shareholders. Because of the significance of the reform in the first group of companies, Sany Heavy Industry had to revise the scheme in order to appease the protest with a concession that 0.5 more shares be added to the three shares for every ten shares as prescribed originally. The cash compensation would remain the same. As a result, the big shareholders of Sany ended up compensating the smaller shareholders with three million more shares worth close to RMB60 million (US$7.5 million). The result? Millions were lost because of off-handed remarks from Liang.
The second company to pay dearly for not considering public opinion was Tsinghua Tongfang Co., Ltd. (600100.SH).
As one of the first groups of experimental state-owned enterprises engaged in stock reform, Tsinghua Tongfang’s share reform scheme proposed that circulating shareholders should get 3.56 shares of stock for every ten shares held, higher than the average level of three shares for every ten shares. However, during meetings with circulating shareholders, Tongfang chairman Rong Yonglin announced to the media that China’s State-owned Assets Supervision and Administration Commission of the State Council (SASAC) had participated in the scheme of drafting stock reform from the very beginning, with the basic premise that “state-owned assets should not be discharged”. Furthermore, he said, the present scheme had been soundly estimated and nothing would be altered.
At the investor meeting on shareholder-structure reform, Lu Zhicheng, President and CEO of Tsinghua Tongfang, showed indifference to a proposal from small shareholders that the compensation be raised. Rong also stressed that even if the scheme was refused, they would not change it any more. Shareholder representatives were enraged. The meeting soon turned into a farce.
Tsinghua Tongfang’s stock reform scheme was eventually voted down in June, 2005 by nearly 37% of the circulating shareholders. The scheme was postponed. Circulating shareholders did not forgive the company until it restarted stock reform in January, 2006, raising compensation to 3.8 shares for every ten shares held.
One report speculated that Tsinghua Tongfang spent over RMB10 million (US$1.25 million) for both stock reform attempts.
