China to Liberalise M&A Rules to Consolidate Industries With Overcapacity

China will liberalise its rules governing mergers and acquisitions (M&A) by listed companies as it looks to consolidate many of industries to avoid overcapacity.

The official Shanghai Securities News, citing an official, reported that the country's security regulator, the China Securities Regulatory Commission (CSRC), will also encourage the use of preferred shares and M&A funds for investments.

The move is part of the regulator's wider initiatives to restore confidence in securities markets ahead of the country's scheduled resumption of IPOs in early 2014.

The CSRC deputy director Lu Zefeng said at a conference that China would amend its M&A and company restructuring rules to make them more market-oriented.

The new rules would make transactions more transparent and simplify administrative approvals required for M&A. In addition, the CSRC will try to make reforms in M&A taxing rules with the help of other ministries, according to Lu.

Furthermore, the CSRC will promote the usage of preferred shares and M&A funds in order to finance M&A deals.

Preferred shares are securities that offer fixed dividends and enjoy seniority over common shares in the case of bankruptcy.

However, they do not dilute the ownership of the company and do not carry voting rights. Therefore, the securities are widely used by companies to source funds for especially for expansion purposes.

M&A Market in China

Between January and November, 1,295 transactions took place between Chinese companies, worth a total of $68.63bn (€49.8bn, £41.8bn), according to ChinaVenture data.

Meanwhile, 104 transactions worth $34.5bn involved Chinese companies acquiring foreign ones overseas, and 26 transactions worth a total of $2.04bn involved foreign companies acquiring Chinese ones in China.

Earlier in January, China's bureaucrats announced plans to push mergers in nine key sectors including steel, cement, shipbuilding, autos, and aluminium, which struggle due to over capacity and price battle.

Chinese companies have been struggling to raise funds since November 2012, when the unofficial freeze on IPOs started in China. The companies opting for IPOs could do so starting from January, according to regulators.

The CSRC noted that there are about 50 companies expected to be in sound financial condition required to be listed on a stock exchange, while there are more than 800 companies in the IPO queue.

The regulator is switching to a registration system from the current approval system for IPOs. The new system will allow the market to decide which firms can list.