CSRC loosens reins on idle fund usage

The China Securities Regulatory Commission (CSRC) released new guidelines Friday to ease restrictions on idle funds raised from the mainland stock market.

The new rules widened usage of idle funds collected from the public by allowing listed companies to invest the money in low-risk and high-liquidity products, such as fixed-income government bonds and wealth management products (WMPs) sold by banks.

"By issuing the new guidelines, the CSRC has actually allowed listed companies to make full use of the capital raised through public offerings, a development which is expected to promote the efficient use of these funds," Li Yongsen, a researcher at the Financial and Securities Institute of Renmin University of China, told the Global Times Sunday.

Theoretically, a company should use all of the capital it collects from a public float to finance the project which motivated the fundraising offer in the first place; yet, in reality, many companies end up with idle funds after they raise more than they need, or when some of the money raised does not get put into the target project, Li explained.

In such circumstances, it is inevitable and understandable if listed companies occasionally use the raised funds on short-term investments; yet such maneuvers in the past often led to accusations of misappropriation or charges that the company had changed the investment purpose of the funds without the consent of investors, according to Li.

The new CSRC rules also stipulate that companies can only put these funds into low-risk products that guarantee the investment principal and can unwound at any time.

"This is a way to standardize the investment choices listed companies have, while still maximizing interest and ensuring the safety of the idled funds," Li said.

Meanwhile, listed companies are required to accurately and completely disclose how the idle funds are used in a timely manner. Details such as the amount invested, the time period of the investment, the distribution of investment income as well as the scope of the target product should all be made publicly available within two days after a company's board of directors approves the plan, according to the CSRC's latest rules. Companies would also be required to republish this information every six months in order to keep investors up-to-date.

In addition to opening the door on investment, the new rules also loosen the term limit on using idle funds as temporary working capital from six months to one year.

At the same time, in cases where excessive funds are raised, the CSRC has also increased the proportion of the amount which companies can use annually to replenish working capital or pay off bank loans to 30 percent, up from 20 percent. The latest rules will apply to all listed companies.