After the success of a pilot project, the nationwide reform of split (tradable and non-tradable) share merger was officially launched yesterday as 40 companies listed on the A-share market unveiled their detailed proposals to float their non-tradable shares.

Twelve Shanghai-listed companies and 32 Shenzhen-listed companies including 8 listed on SME (small and medium-sized enterprise) Board were allowed by the two stock exchanges to take measures to float the non-tradable shares.

The 40 companies cover a range of industries such as banking, manufacturing and pharmaceuticals.

These companies offered more generous compensation to the holders of tradable shares.

The 12 Shanghai-listed companies offered, on average, 3.2 shares to the holders of tradable shares for each 10 held, higher than the number of 3 shares for the pilot firms.

The China Minsheng Banking Corp, China's first joint stock commercial bank, offered 1.55 shares to all its shareholders for each 10 held.

The holders of non-tradable shares gave up their part of new shares and transferred them to the holder of the tradable shares.

Minsheng's holders of tradable shares will get 5.2 shares for each 10 at hand.

State-owned enterprises (SOEs) accounted for about half of these 40 companies.

Nine of the 12 Shanghai-listed companies and 10 of the 28 Shenzhen-listed companies are SOEs. About 67 per cent of the 12 Shanghai-listed companies' shares are State shares and are non-tradable.

But share offering was still the main compensation approach, although the regulator and some key State departments announced they would urge companies to use more diverse ways to deal with the issue.

Nine of the 12 Shanghai-listed companies and 25 of the 28 Shenzhen-listed companies compensated shares to the holders of tradable shares.

"This is because of the simplicity of share offering," said Wai Kai, a senior research department manager of China Securities.

    Compared with other methods such as warrants, share compensation was easier for retail investors to understand and consequently get their approval, he said.

All the companies' compensation proposals can be taken into effect only when getting the nod of at least two-thirds of the holders of tradable shares

Besides share offering, some companies also gave many promises to their holders of tradable shares in order to avoid a sharp drop of the share prices.

The Shanghai Automotive Industry Corporation Group (SAIC Group) announced it would use no more than 1 billion yuan (US$123 million) to buy back its stocks from the market if the share price fell below 3.98 yuan (49 US cents) per share at the market.

SAIC's average price over the past 30 trading days before last Friday was 5.09 yuan (63 US cents) per share.

SAIC Group also promised to distribute cash dividends to its shareholders using at least half of the company's distributable profit in the coming three years.

Almost all of the 40 companies are good market performers.

Eight of the 12 Shanghai-listed companies' income / net asset ratio exceeded 10 per cent last year. The average per share earnings for the 28 Shenzhen-listed companies was 0.4 yuan (5 US cents) last year, higher than the national level of 0.24 yuan (3 US cents).

The overhang of the non-tradable State shares was one of the key sources of China's sluggish stock market, said Liu Jipeng, a prominent expert and professor of the Capital University of Economics and Business.

China's shares have suffered a dramatic slump over the past four years and dropped to 1,188.2 points yesterday from about 2,200 points in June 2001.

China has tried to address the problem at least three times - in 1999, 2001, and again now.

In the first attempt, two pilot SOEs were selected to sell their state shares to the holders of tradable stocks. The experiment was not welcomed by the investors and within 15 days of the experiment, the share price of the two companies fell about 40 per cent. The regulator then had to give up.

The second share-merge attempt failed badly in 2001 because the guideline then was to price the traded and non-tradable shares equally.

In the present third attempt, the price of non-tradable shares is decided by the companies who negotiate with their small shareholders, or holders of the traded shares, the professor said.

Source: China Daily