After launching the delisting program, Xintai is still being speculated by some investors. This suggests that regulators still have a lot of work to do in educating and protecting the investors. In addition, relevant steps should be taken to minimize investors' losses, for example, setting up a pre-compensation mechanism.
Since the resumption of trading on July 12, *Xintai will be the first stock delisted because of fraud issuance. However, it is surprising that after 11 consecutive trading days, on 27th, *Xintai closed at harden price with 227 million yuan trading volume, the turnover rate is over 57%. Does such data mean that some investors are bigger fools? What aspects of the current investor education need to be improved? Is there anything we can do to improve investors’ education? And how to protect small and medium shareholders of delisting company?
Investors protection need be improved
For ordinary investors, there are two trading opportunities after the launch of delisting, namely the moratorium periods and the termination period, which is about 60 days in total. However, there are many speculators in such short trading hours, suggesting that current investors’ education and investors’ protection need to be improved.
He Fajie, a financial researcher, said that because of our market pays more attention to financing instead of return for a long time, the protection of small investors’ interests should be strengthened.
“We should promote investors’ education in at least two aspects.” Yin Zhongli said, deputy director of Financial Markets Research Office of the financial markets of the Institute of Chinese Academy of Social Sciences. On one hand, there is information asymmetry among small and medium-sized investors, bigger fool mentality will exist, so listed companies should disclosure more information; and investors should be given more warning education. On the other hand, some investors can't participate in decision-making of listed companies, even know little about *Xintai; the short-term speculation is strong, with no long-term value investment idea. This also suggests that current voting rights of investors are not well protected, and the rights of small and medium investors needs to be refined.
“In addition, from the delisted ‘bo yuan’ and ‘Wan fu sheng ke’ and other cases, we can see that most small and medium-sized investors do not choose litigation claims because of high costs and long term. This is also where we should improve our investor protection system. said Tian Lihui, professor at the Institute of Financial Development at Nankai university.
Compensation mechanism need be improved
In this case, the special compensation fund set up by the sponsor is the highlight of the case. According to related regulations, underwriters promise that, if any losses is related to its initial public offering for the issuer, file has false records, misleading statements or major omissions, it will compensate investors beforehand.
Xingye Securities, as Xintai’s underwriter, has set up a $550 million compensation fund in advance and launch announced that, following investors can be compensated: bought shares of Xintai from the day of false statements implement to expose day (July 14, 2015) or correct day (November 27, 2015 or December 10,2015) and after exposing day or correct and sell/hold them after expose day or correct day. If such investor’s return deducted by the market return is negative, the fund will compensate for that loss.
According to He Fajie, the beforehand compensation mechanism is an effective arrangement based on the special situation of China's market. Professionals prompted investors to receive compensation solved the problems of investors’ unwilling to fight for their rights, and also reduced the amount of time and energy they should have cost, which is in line with the current situation of investor protection and the market.
However, some investors may still be unable to get paid despite of the compensation fund. Investors who bought shares of Xintai from the day of the disclosure or the correction to the day before suspension will not be reimbursed by the special fund. Also, investors who lose money have to deduct market factors, which is limited by the actual direct losses incurred by qualified investors. For example, investors lost 10% and the market fell 10% over the same period, they cannot get compensation, and only those that exceeded the market's decline could be compensated. Said one marketer.
Continue strengthen foundation
This June, the revised Measures for the Administration of Securities Investors Protection Fund was launched, marking that the investors protection fund system in China reaches a new level. Previously, government took all personal debt of disposed financial institutions. It is a great progress of financial institutional risk management.
To strengthen education in investment, China Securities Regulatory Commission completed the first batch of 13 investors education base and 13 national securities and futures education bases in May.
“Xintai’s compensation is designed in line with the previous investor protection system, which is basically in line with China's condition and the arrangement of the listed companies’ delisting system.” According to Tian Lihui, the matured capital market generally has three kinds of delisting, the first way is voluntary withdrawal through merger and acquisition; Second, a few companies achieve delisting by bankruptcy and reorganization; the last way is the forced delisting mode by the securities regulatory authorities for fraud issuance and other behaviors, and paying penalty to investors is the main solution. Cases like Xintai, compensated by underwriters is reasonable in China.
“From a deeper point of view, it is necessary to improve the investor protection system, but it is not enough if we only educate investors. We need to fundamentally improve the system of delisting and IPO. Only if the delisting mechanism has been improved and the shell resources have been reduced, small and medium-sized investors will not be too speculative, or even buy and sell blindly and unwisely. Also, we should further improve the information disclosure system, increase the legal requirement for information disclosure of fairness and timeliness, actively guide listed companies to establish a sustainable, clear and transparent dividend policy and decision-making mechanism, perfect the requirement of governance of listed companies, fully guarantee small and medium shareholders’ participation in decision-making. In addition, we need to enforce penalties on illegal behaviors, and formulate complete legal responsibility, to protect investors in a better way.” said Yin Zhongli.
