Last week, the China Securities Regulatory Commission (CSRC) announced it would start publishing information on the proceedings of restructuring plans as well as mergers and acquisitions (M&A) proposed by mainland-listed companies on a weekly basis. The CSRC made good on this promise by revealing on the same day this announcement was made that it had terminated reviews of M&A deals from seven companies, citing irregularities in their applications.
This move not only highlights the CSRC's determination to promote transparency and information disclosure regarding administrative examinations, but is also a call for greater public scrutiny of restructuring and M&A activities, which are frequently marred by insider trading.
M&A deals and restructurings are common corporate strategies in the capital market, and can help enterprises achieve rapid growth via equity transfer. For this reason, such deals are often hyped up in the secondary market to temper trading sentiment.
At the same time, M&A and restructuring moves typically produce a considerable amount of insider information during the long process between an initial proposal and a final stake transfer. An insider could easily take advantage of their first-hand knowledge and the lack of information presented to the public to profit from the company's stock performance.
The fact that Chinese companies occasionally propose M&A and restructuring bids solely for the purpose of drumming up the prices of their shares presents yet another pitfall for the mainland capital market. In recent years, the domestic market has seen several instances of junk firms announcing ambitious M&A deals with established enterprises to fool investors into thinking their shares are undervalued by the market.
Undoubtedly, persons with behind-the-scenes knowledge of M&A and restructuring activities can reap enormous financial windfalls in the stock market from their positions as insiders, leaving hapless individual investors out of luck.
While China's securities regulator has been trying to curb insider trading for years, the situation at mainland markets has yet to improve much, given the difficulties inherent in following and supervising every listed company's plans to restructure.
Hopefully, the weekly publication of the CSRC's restructuring and M&A proceedings will enhance its supervision powers by opening the door to more public scrutiny. As more information is made available, investors can look for abnormal fluctuations in a company's stock price before or after it proposes an M&A deal and report suspected cases of insider trading to securities authorities.
With insider trading still a persistent and widespread ailment plaguing the mainland A-share market, stamping out this problem will require both stronger oversight from regulators as well as active participation from investors. Such a two-pronged approach will hit insider traders from all angles and put M&A and restructuring deals back on the right track.
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