Impact of high-level financial investments on A-share firms’ refinancing

A-share listed companies should exercise care when identifying their financial investments and keeping their proportions within compliant limits

This article aims to explore the impact of high-proportion financial investments on the refinancing of A-share listed companies, and to summarise treatment methods for financial investment under special circumstances.

The China Securities Regulatory Commission (CSRC) has established a common issuance condition for refinancing, stipulating that: “Except for financial enterprises, there should be no significant financial investments at the end of the most recent quarter.”

This helps regulate and guide listed companies in focusing on their core businesses. It helps them to engage in rational fundraising, reasonably determine financing scales, improve the efficiency of fund utilisation and prevent the disguised use of raised funds for financial investment.

In this article, refinancing primarily refers to A-share listed companies raising funds by issuing securities with equity characteristics such as stocks and convertible bonds, and depositary receipts.

PROPORTIONAL LIMITATIONS

For non-financial listed companies, the CSRC defines financial investments as including:

• Investment-related financial business;
• Non-financial enterprises investing in financial businesses;
• Equity investments unrelated to the company’s core business;
• Investments in industrial funds and M&A funds;
• Borrowed capital;
• Entrusted loans; and
• Purchases of highly volatile and risky financial products and other similar forms.

However, the following are not classified as financial investments:

• Industrial investments along the supply chain to acquire technology, raw materials or channels; M&A investments aimed at acquisition or integration; and borrowed funds and entrusted loans to expand customers or channels. If these investments align with a listed company’s core business and strategic development, they are not classified as financial investments;
• Financial investments formed through establishment or policy-driven restructuring for historical reasons, and which are difficult to exit in the short term;
• Financing lease, commercial factoring and supply chain finance closely related to the listed company’s core business, meeting the industry’s requirements, customary practices and industrial policies.

The CSRC requires listed companies to ensure that the total amount of their held and intended financial investments in the most recent quarter does not exceed 30% of the net assets attributable to the parent company in the consolidated financial statement (excluding investments in financial-like businesses within the scope of the consolidated financial statement).

Therefore, the proportion of financial investments to net assets of a listed company will affect its ability to engage in refinancing. If financial investment exceeds the 30% limit, the company must reduce the proportion of financial investments to below 30% before applying for refinancing.

DEDUCTING RECENT INVESTMENTS

The CSRC explicitly stipulates that the amount of a listed company’s financial investments (made or planned in the six months prior to the initial resolution of the refinancing and up to the issuance date) should be deducted from the total amount of funds raised in the current round. (Investment refers to the payment of investment capital, disclosure of investment intentions, or signing investment agreements.) This is to prevent listed companies from facing financial shortfalls due to recent and planned financial investments, and to fill the gap through refinancing.

It should be noted there is currently no clear calculation method for financial investments. Specifically, it is unclear whether a financial investment amount should be calculated on the cumulative financial investment or on the net financial investment.

However, precedents such as the example of Yechiu Metal Recycling (China) suggest that the regulatory requirement is to calculate the financial investment amount based on the cumulative investment amount in the six months prior to the company board’s refinancing resolution, and up to the issuance date. For instance, financial investment amounts should be calculated on the cumulative purchase value of bonds and stocks acquired through the securities market, rather than the net value held at the end of the quarter.

NON-FINANCIAL COMPANIES

Financial-like businesses theoretically fall under the category of financial investments. For non-financial companies that are engaged in financial-like business and are listed on the stock market, the CSRC has implemented regulations to prevent the disguised use of raised funds for financial-like business.

To proceed with the review process for refinancing, listed companies engaged in financial-like businesses and with the percentage of revenue and profits derived from financial-like businesses that should be below 30% of those at the end of the most recent quarter, must meet the following conditions:

• The amount of new or planned investment in financial-like business (including capital increases, loans and other forms of financial investment) made in the six months prior to the initial resolution of refinancing by the board of directors should be deducted from the total amount of funds raised;
• The company must not make any additional investments in financial-like businesses (including capital increases, loans and other forms of financial investment) before the raised funds are fully utilised, or within 36 months from the receipt of funds.

Considering this analysis, and given the substantial obstacles to refinancing that can be posed by high-proportion financial investments, we recommend that non-financial A-share listed companies should first clearly identify which of their equities fall under financial investments in their business operations, then screen them in future investment activities.

If a listed company has plans for future refinancing, it should pay particular attention to keeping the proportion of financial investment within the 30% limit. Additionally, it is crucial to refrain from making any new forms of financial investment (including buying securities and immediately selling them) in the six months prior to the initial resolution of refinancing by the board of directors and up to the issuance date, to avoid affecting future refinancing endeavours.

Xu Tao is a partner at Tian Yuan Law Firm. He can be contacted at +86 186 1658 8201 or by e-mail at xutao@tylaw.com.cn
Yan Cong is an associate at Tian Yuan Law Firm. He can be contacted at +86 186 0161 8428 or by e-mail at yancong@tylaw.com.cn