Domestic securities companies are studying the feasibility of applying warrants to the rights offer for public firms to keep a lid on corporate management.
"To the best of my knowledge, nearly all the major brokers in China are studying the feasibility of warrants. Every one wants to have a bite of the new financial derivative," said Lian Mengke, an analyst with the Haitong Securities Co Ltd, co-author of the thesis entitled the Application of the Warrant to the Rights Offer.
Warrants, a type of securities derivative product, give buyers the right to purchase the securities from issuers at a pre-determined price within a certain time frame, but the right is optional rather than obligatory.
Generally speaking, warrants are traded on the stock exchange and the price is also subject to supply and demand, just like for stock transactions.
If applied to additional share sales, holders of the warrant would reserve the right to purchase the new shares to be sold by the listed firm, which issues the warrant.
Analysts said the introduction of warrants would help to reduce mismanagement by listed firms planning to float additional shares. Many domestic listed firms have mismanaged the money they raised from new share sales or have their capital used illegally by their major shareholders who regard the companies as their personal piggy banks.
Although investors need to pay for the warrants, the amount of proceeds companies get from the sales of warrants is only peanuts compared with that from the sales of additional shares.
Holders of the warrants could decide whether to exercise the right to purchase them, depending on the fundamentals of the listed company or the market swing.
If the company plays foul or reports weaker profits, holders can opt to either refuse the exercise over the right to buy the new shares or simply sell the warrant on the stock exchange.
"That would curb the misconduct by listed companies' senior executives and the major shareholders as well," said Lian of Haitong Securities.
Yang Zhenghong, an official with Shanghai Stock Exchange, was quoted by Chinese-language newspaper Economic Observer as saying that the warrant allows investors to have a say on the second financing for listed firms.
"For listed firms, the issuance of warrants would do good to building up their images on the stock market," Yang said.
Haitong Securities is reportedly working on the issue of warrants for Shenzhen-listed Panzhihua New Steel & Vanadium Co Ltd. China Merchants Securities Co Ltd and Guotai Jun'an Securities Co Ltd are also said to be joining in.
(Shanghai Daily July 2, 2003)
