Will Non-Dividend Payments Lead to Delisting?

In recent days, the A-share market has experienced turbulence akin to a seismic event, leaving investors reeling from the shock waves. The micro-cap index has plummeted by 18% over just two days, drawing comparisons to earlier this year when the index fell from 3000 points to a concerning low of 2635 points. While the nature of these market fluctuations differs, both scenarios highlight a common concern: liquidity issues plaguing the market.

This drastic movement in the stock market can be mainly attributed to the announcement of the "Nine National Policies" last Friday, which introduced significant changes in regulations concerning dividend payouts and delisting procedures. The prominent shift towards attaching a warning label when companies fail to meet expected dividend payouts has sent ripples through market sentiment, instilling fear and uncertainty among investors.

On April 16, the China Securities Regulatory Commission (CSRC) took a significant step in response to the concerns surrounding dividends and delisting rules. The revision of stock listing regulations now includes provisions that impose Special Treatment (ST) status on companies that do not meet their dividend obligations.

ST, short for Special Treatment, signifies that a stock is under particular scrutiny due to irregularities in its financial situation or other circumstances that are deemed abnormal. Such a label acts as a risk warning from the stock exchange to investors, alerting them to potential dangers associated with the company.

Advertisement

The regulatory system for risk warnings consists of two categories: companies that are at risk of being delisted will have their stock symbol prefixed with "*ST," indicating a delisting alert. Conversely, if a company's main bank accounts are frozen, triggering other types of risks, the symbol will be prefixed with "ST." This differentiation allows investors to identify these stocks easily, which potentially face greater risks than usual.

In line with these revised regulations, the ST label for firms failing to provide adequate dividends indicates financial warning but does not necessarily equate to delisting risk. This amendment primarily targets companies that, despite having the financial capacity to pay dividends, choose not to distribute returns to shareholders. If a company's cumulative dividends fall short of predetermined criteria over three years, it will receive a risk warning sign, reminding investors to tread cautiously in their future investment decisions concerning these lower-yield firms.

It is essential to clarify that merely being subjected to the ST designation due to non-payment of dividends does not immediately result in delisting. Companies can petition to have the ST status revoked if they rectify the situation. Furthermore, exceptions exist for companies heavily invested in research and development, which may not be penalized with ST status even if they fail to meet dividend distributions.

The introduction of ST labels for underperforming dividend stocks aims to enhance the reliability and predictability of dividend distributions among listed companies. These changes also serve as an impetus for firms to improve their performance and positively engage with the market; otherwise, they risk being gradually discarded by investors, as consistent price declines could lead to eventual delisting.

The adjustments to delisting criteria are meant to intensify efforts in weeding out "zombie companies" and "bad apples” from the market, rather than solely targeting small-cap stocks. Regulatory authorities have provided concrete data to back their approach: according to the latest rules, approximately 30 companies on the Shanghai and Shenzhen exchanges are projected to meet the delisting criteria next year, while around 100 may initially receive delisting risk warnings. However, many of these companies still have opportunities over the next 18 months to improve their operations and enhance their overall quality before facing delisting by the end of 2025. Currently, in terms of market capitalization, only four major companies on the boards are valued under 500 million yuan, and no companies from the STAR Market or ChiNext are approaching the 300 million yuan delisting threshold.

While the new delisting practices may appear stringent, it is crucial to note that a significant number of quality companies still exist among small-cap stocks. The fundamental intention of regulation becomes clear, focusing predominantly on performance and market return. Even smaller companies that demonstrate exceptional performance and actively distribute dividends to investors will not have to worry about their standing. The regulatory measures surrounding dividends and delisting are aimed at purifying market values and guiding publicly listed companies towards more responsible actions in rewarding their investors.

Ultimately, investors should not feel compelled to distance themselves from small-cap stocks entirely. Instead, they should be discerning and steer clear of speculative companies that lack substance or are mere shells. A new investment philosophy should emerge, one that moves away from speculation and towards sound, performance-oriented companies offering real value in their returns.