China relaxes restrictions on companies buying back shares

China's top legislature on Friday adopted revisions to the Company Law, which relaxed restrictions on public companies making stock buybacks.

A Chinese investor looks at his smartphone in front of an electronic display showing prices of shares (red for price rising and green for price falling) at a stock brokerage house in Nanjing city, east China's Jiangsu province, 17 October 2018. [Photo: IC]

Companies were previously banned from buying back their publicly traded shares except under four circumstances, such as when granting employees equity incentives.

Further loosening the restrictions, the revised law allows companies to buy back shares if they use them to issue convertible bonds or when the companies act to defend their corporate value and shareholders' interests.

Restrictions on decision-making procedures as well as how long companies can hold the repurchased stock have also been relaxed.

Share repurchasing is believed to be a necessary corporate tool in conducting mergers, acquisitions and restructuring, and plays a vital role in improving governance structures and stabilizing share prices.

Analysts believe stock repurchase operations could send a positive signal to the market and alleviate market jitters in cases of extensive underestimation of shares.

Data from the China Securities Regulatory Commission shows companies listed on the Shanghai and Shenzhen exchanges have carried out 2,169 share repurchases since 2014, with a total net worth of nearly 53 billion yuan (about 7.63 billion U.S. dollars).

The revised law went into effect immediately.