Today Chinese Securities Market is a binary level system composited of tradable shares and non-tradable shares. These are special kind of shares enabling the holders to exactly the same rights as holders of ordinary shares except for public trading.
Chinese authorities have tried to deal with the difficulty of non-tradable shares on quite a few events, predominantly in the year of 1999 and 2001. In the first effort, two companies were nominated to sell their state shares to the floating investors. The research was not well established by the investors and within 15 days from the declaration of the allocation program the share price of the two companies chopped by 40%. The second effort failed badly in 2001 apparently because the offer predicted an equal pricing for tradable and non-tradable shares.
In January 2004, the Chinese government revealed officially NTS as a foremost barrier for domestic financial development and stated its assurance to face the problem in the immediate future.
During the years 2005 and 2006, the government of China executed a modification destined at eradicating the so-called non-tradable shares that are normally held by the politically connected official investors or the State, which were dispensed at the early stage of financial market enlargement. On September 5th, 2005, China Security Regulatory Commission delivered the “Measures on administration of split share structure reform of listed companies”, the main licensed paper containing the details about the execution of Non-tradable Shares reform. The reform accommodated the holders of NTS to pay the holders of tradable shares (TS) for the prospect to sell their shares in the future. Separately from the payment, the reform had very little direct instant impact on the structure of the Chinese stock market in the short run.
The strategies proven the following stages for the implementation of the reform include; the owners of Non-tradable Shares demand the board of directors to initiate the reform process, the panel must seek the assistance of an exterior sponsoring institution and of a law firm to draft the tender, the guarantor must refer the stock exchange about the possibility of the proposal and assemble a meeting with the significant market shareholders, The proposal needs a competent preponderance of two-thirds of the members. If the tender is accepted the board must expose the schedule for definite execution of the reform, finally, the trading is resumed after the investor meeting passing the completion of the reform.
Non-Tradable Shares have been allotted to the initiators of a corporation, business partners or workforces and assisted two core resolutions; to keep confidently in government’s hands the control of State-owned enterprises that were floated in the market, secondly to maximize initial public offering (IPO) proceeds.
Moreover, in detail the Government and the governing, supervisory authorities rapidly recognizing that the power of NTS created a problem for the market from some facts and visions. Firstly, the owners of Tradable Shares were characteristically minority shareholders with limited power to upset management results or decisions. Secondly, the limited free float existing made the domestic market extremely illiquid, unstable and hence liable to market manipulation and insider trading. Third, the incompetence of the domestic market prompted many valuable Chinese companies to list overseas. This unpleasantly affected native investors who disallowed to invest in the best companies, were trapped with holdings the less performing confined companies.