As part of its effort to attract both domestic and foreign institutional investors into the market, the Shanghai Stock Exchange (SSE) released the Guidelines on Distribution of Cash Dividends (Chinese) on Monday, January 7.
In order to bolster investor confidence, the Guidelines recommend that companies distribute annual cash dividends of at least 30% of net profits. Companies that distribute cash dividends of at least 50% of net profits during a fiscal year and have disclosed dividend distribution policies will be rewarded with a “green light channel” designation, which will help expedite SSE of re-financing and M&A transactions. In addition, these companies will receive bonus points in determining corporate governance awards and annual assessments of board secretaries. Those who fail to meet the 30% threshold for dividend payouts should provide a full explanation and disclose the alternative usage of undistributed profits in their annual reports.
The Guidelines were issued to bolster the provisions of the Notice Regarding Further Implementation of Cash Dividends Distribution of Listed Companies (Chinese), announced by the China Securities Regulatory Commission (CSRC) in May of 2012. In response to the announcement, many companies in China amended their dividend distribution policies in 2012 to pay out cash dividends of no less than 30% of average annual net profits in a three-year period and to set forth dividend distribution procedures in greater detail.
The Guidelines and Notice are emblematic of a larger trend. According to the SSE, companies listed on the exchange have steadily improved their cash dividends distribution in recent years, with the average dividend yield ratio of listed companies rising from 0.85% in 2009 to 1.49% in 2011. In addition, by the end of 2011, 40% of the listed companies had paid out cash dividends for three consecutive years, while cash dividends distributed by SSE-listed companies totaled RMB 472 million. As one SSE spokesperson admitted, “There is still a long way to go before the SSE-listed companies increase their dividend payment ratios to the level of their counterparts in the more mature markets.”
Ideally, the announcement of the Guidelines will ultimately result in higher and more consistent dividend payouts and improved disclosure, though there is no guarantee. Some companies may even amend their articles of association to enshrine these principles. In addition, while the Guidelines are not binding, companies with significant financing needs or prospective acquisitions may see greater shareholder returns as a means to secure corporate ambitions.