TOP TIPS: Risks of raising offshore Rmb equity
For CFOs considering following Hopewell Highway in raising offshore renminbi shares, Edward Au, Deloitte China’s national co-leader of public offering group (pictured), offers advice.
- The timing for repatriating renminbi funds raised in Hong Kong to mainland China may not be easy to manage since approvals from various Chinese government authorities are needed.
- For channeling funds exceeding Rmb300 million, direct approval from the state government in Beijing is required. Therefore, issuers should evaluate and devise their plans for utilising the proceeds and meeting the requirements of the respective currencies carefully.
- Institutional investors, who account for the bulk of share subscription in any IPO, may be very cautious with the demand of the shares due to the FX risk in converting part of their US dollar/Hong Kong dollar-dominated investment portfolio into renminbi since the range of renminbi investment products are still limited in the market.
- The secondary market for the renminbi IPO shares can possibly lack liquidity since the suite of renminbi investment products is limited. This may potentially dampen the valuation of these shares.
- Issuing of renminbi stocks by an already-listed company means the company enjoys a large and solid shareholder base. Its Hong Kong dollar stock can provide good, published track record of business as well as a trading share price for investors' to evaluate for new issuances.
- Allotment of new shares by Hong Kong-listed companies requires shareholders' approval unless a general mandate has been given by them to the company's directors to authorise the issuance within a fixed period of time and up to a certain percentage of the issued share capital.
- Typically, a general mandate will be proposed in the annual general meeting of the company and usually a maximum of 20% of its issued share capital will be issued.
- Allotment of new shares of a listed company in private placement will usually be at discount over its trading share prices due to the block trade discount.
- The listed company needs to evaluate carefully its funding needs, so as not to dilute the equity interests of the existing shareholders significantly.
- Arbitrage comes naturally as part of the capital market transactions, which helps reduce the margin of the two tranches.
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Such issuance can expand a company's investor base by adding a layer of investors who focus on renminbi-denominated investment.
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