Bloomberg is reporting that Bank of America’s plan to sell $2.8 billion of shares in China Construction Bank that was pulled at the last minute on Dec. 15 was done so because of a securities law provision that would have required it to forfeit the profits on the sale.
China’s securities law bans investors holding more than 5% of a locally incorporated, publicly traded company from selling shares within six months of buying the stock. Not that such a law is on the statutes by happenstance, of course.
Bank of America first invested in China Construction in 2005, taking a $3 billion pre-IPO stake. It put in another $1.9 billion last June, and a further $7 billion in November, by exercising an option that was part of its first deal in 2005. That took BofA’s stake to 19.3% and gave it an estimated paper profit of $15 billion.
BofA needs to raise cash to recapitalize its balance sheet. But China doesn’t want strategic stakes in its banks traded like baseball cards, and it may have an eye on the end of the lock-ups next year for foreign investors in Bank of China and Industrial & Commercial Bank of China. Hence the law, which applies to shares of China-incorporated firms traded in Hong Kong as well as on the mainland exchanges.
Nor is it afraid to use it. Martin Currie Investment Management, a Scottish money manager, had its local bank deposits frozen by a Chinese court in June after selling part of its 5.9% stake in Nanning Sugar Manufacturing just five months after acquiring it.
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