Bill for A-Share Stock Pumping Scheme Comes Due With 74pc Losing Money

Back in 2017, companies told their employees to buy shares because they were a great value. Some companies even guaranteed employees they can't lose money because the company will compensate them. The stock buying scheme is coming due and employees should be compensated at least 16 million yuan based on available data.

China Financial Markets: Guaranteeing Employees Against Losses

The devil is in the details, of course, but assuming that these programs can be put into place efficiently, for employees such programs are the equivalent of receiving a free put option for every share they purchase, with the option struck at the price at which they purchased the shares. Share prices for small companies on the Shenzhen Stock Exchange are likely to be very volatile, so these are valuable options. This is a very good deal for employees who decide to buy shares.

...The program is clearly a bad deal for existing investors if the company pays for the program, and it is a bad deal for the chairman if he personally pays for the program. Why then would the chairman make such an offer? One very likely explanation is that the chairman owns a lot of shares in the company but is exposed in such a way that if stock prices fall substantially, he loses his shares anyway. In that case, there is no additional cost to him for the guarantee.

The most likely form that such a position would take is that the chairman has borrowed heavily and has used the shares as collateral. In that case, if he can deliver the shares to the lender when prices have fallen, and retain no other contractual obligation (either because it is a non-recourse loan, or because he has no other attachable wealth), he has in effect a put option from the lender that substantially matches the put option he has transferred to employees who buy shares under the program.

21st Century: “兜底式增持”补偿期限将至，七成员工股票浮亏

year ago, the sharp adjustment of the A-share market, the secondary market continued to weaken, many companies under pressure. A number of company board of directors issued a proposal, saying that the stock price appeared "irrational decline" and stressed that "the value of the company's stock investment has become prominent". The company's employees were actively promoted to buy shares of their own companies, and the losses during the employees' shareholding period were "sold by me." make up".

...As a result, "overweight support" was intensively staged in June 2017. According to incomplete statistics from the China Securities Journal, only in June 2017, the board of directors or actual controllers of 23 listed companies in A-shares encouraged the company’s employees to actively buy shares of their own companies, including Fenda Technology, Anjubao, and Star Micro , Ke Lu Electronics, Xing Hui Entertainment, Great Wall Animation, Great Wall Film and Television, Bao Wright, Ke Mei Te Qi, wisdom Song De and so on.

Shares of early adopters benefited in the short-term, but losses have mounted with 70 percent of participating companies seeing losses:

However, with the increase in the number of companies that launched the "oversize support" initiative, the "daily limit effect" quickly disappeared, and many companies' stock prices quickly recovered. As of June 1, 2018, FENDA Technology's closing price fell to 8.94 yuan / share, compared to 13.05 yuan / share of employee holdings have fallen 31.49%; Anjubao stock price closed at 5.08 yuan / share, compared to The average price of 9.33 yuan/share decreased by 43.74%.

...As the promises near the end of their pockets are approaching, most of the company’s stock price movements have not been strengthened by pocket-like holdings. According to the statistics of the China Securities Journal, among the 23 stocks listed above, 17 stocks have fallen, accounting for more than 70% of the stocks. Among them, 9 stocks fell more than 10%, 4 stocks fell more than 30%.

China Securities Journal calculates three of the companies' chairmen will have to cough up about 10 million yuan. The total cost is north of 16 million yuan with no data on three of the companies.

How large is the size of these pocket-sized holdings? According to statistics from the China Securities Journal, the above-mentioned staff increase plan has increased the holding funds to 113 million yuan, and the chairmanships of the 3 companies have exceeded 10 million yuan. If you want to go all in, the chairman of these companies will have to sell 163.4441 million yuan in total (excluding 3 companies who did not issue specific holdings).

It is worth noting that there has been an upgraded version of the "all-encompassing holdings." On June 12, 2017, Guo Xiangbin, the actual controller of Converse Culture, promised that during the period from June 12 to June 15, 2017, the company’s employees would use their own funds to buy the company’s shares on the net, and they would hold 12 consecutive shares. Those who have worked in the same month, such as the actual loss incurred in buying the company's shares during the aforementioned period, will be compensated by the actual controller and the income will be owned by the individual employee.

Gains and losses aside, as explained in the above article, employees had a 12-month period when they could hold shares with limited downside (limited to the risk that the chairman makes good on his promise). That offer no longer stands. Employees are free to sell. Some chairmen also have a need for cash thanks to the failure of their stock support plans.