The Study Of Tunneling In The Course Of Private Placement With Asset Injection

In May 2006, China Securities Regulatory Commission issued a document which specified the terms of private placement. Since then, private placement replaced allotment of shares and issue of new shares quickly with the advantages of lower cost, shorter time, simplicity, flexible methods and lower threshold and became the main way of equity financing.Investors involved in private placement can choose payment methods flexibly and they can use cash as well as non-monetary assets. In the capital market, the private placement of asset injection is popular.On the one hand, asset injection helps to increase the value of the company and improve company profitability. On the other hand, different from America, there are always major shareholders in listed companies of China. Major shareholders grasp firmly the controlling interest of listed companies and the operating decisions of listed companies are at the mercy of major shareholders. In the capital market of China, major shareholders and related parties always get involved in the private placement and they have the motivation and the ability to seek personal gains. On condition of imperfect legal system and market regulation, the private placement of assets injection becomes the tool for major shareholders to tunnel in the listed company. Some major shareholders deliberately depress the stock price before private placement to get shares at lower price, inject inflated price assets into listed company or acquire cash bonus after private placement to transfer resources of listed company.Now there are different opinions among international and domestic academics about whether there is tunneling in the process of private placement and asset injection. As for research methods, academics mainly use models, event study, multiple regression models and descriptive statistics to analyze whether there is tunneling in the process of private placement and asset injection. Besides, some academics analyze the ways major shareholders use to tunnel and the background of tunneling by theoretical analysis methods. Although some academics use case analysis methods to analyze certain case of private placement, they just analyze one or two ways major shareholders use to tunnel and fail to present all ways major shareholders use to tunnel. Now few academics use case to analyze all ways major shareholders use to tunnel and the economic consequences.So the author uses case analysis methods to analyze the private placement of Chengtun Mining Group Co., Ltd. This paper analyzes ways major shareholders use to tunnel in the process of private placement and asset injection and its economic consequences.Through case studies, the paper draws conclusions as follows. There is tunneling in this private placement and assets injection conducted by major shareholders. And the ways major shareholders use to tunnel are developing lower placement price, high value asset evaluation as well as the use of cash in behavior. Although the asset injected into listed company is not poor, high value asset evaluation turns to be a transfer of benefits from listed company to major shareholders.After the analysis of this case, the author makes relevant policy recommendations as follows:regulate high value asset evaluation, optimize the pricing method of private placement, enhance law and administrative penalty, strengthen post-supervision and accountability system, enhance the transparency of information disclosure as well as strengthen the education of minor shareholders.The structure of this article is as follows:Chapter Ⅰ is the introduction, which is made up of four parts. Firstly, the author recommends the background and research significance. Secondly, part two introduces the research ideas and frameworks. Thirdly, part three introduces the research methods. Lastly, part four introduces the expected contribution and deficiency.Chapter Ⅱ is the literature review. Now there are different opinions among international and domestic academics about whether there is tunneling in the process of private placement and asset injection. Some academics insist that there is tunneling in the process of private placement and asset injection. But other academics insist that there is not tunneling in the process of private placement and asset injection. So this chapter is made up of three parts and first two parts introduce the different opinions respectively. Based on the relevant literature review, part three points out new research directions.Chapter Ⅲ is the theory analysis of tunneling in the process of private placement of assets injection. This chapter is made up of two parts. Firstly, part one recommends the agency theory and the information asymmetry theory. Secondly, part two introduces the main four modes of tunneling in the process of private placement of assets injection.Chapter Ⅳ is the case study, which is made up of three parts. Firstly, part one introduces the background of the case. Secondly, the author analyzes the tunneling in the process of private placement of assets injection. Lastly, part three introduces the consequences.Chapter Ⅴ includes the conclusions and recommendations. This chapter is made up of two parts. Firstly, part one draws the conclusions. Secondly, part two makes recommendations relevant.The expected contribution of this paper mainly lies in three aspects. Firstly, this paper analyzes major shareholders how to tunnel in the process of private placement and assets injection with case studies. This not only enriches this field’s research, but also helps to regulate the behavior of major shareholders in the process of private placement and assets injection. Secondly, this article enriches the research of ways major shareholders use to tunnel in the process of private placement and assets injection. The case chosen has a feature that major shareholders use a new way to tunnel in the process of private placement and assets injection. Major shareholders pledge on stock rights which they obtain in the process of private placement to get cash, and the way they use is quite different from others. Lastly, this article emphasizes the violation cost of major shareholders and post-mortem supervision of the private placement.Limitation of this article mainly lies in two aspects. Firstly, this is only a case study in the private placement and assets injection of Chengtun Mining Group Co., Ltd. So it is difficult to cover full ways of tunneling problems in the private placement and asset injection process. Secondly, proposing on the basis of a single case is limited. And they need to be verified whether the suggestions are effective.