Rules for stock market

Shanghai Stock Exchange's new measures to encourage listed companies to increase dividend payouts could boost investor confidence in the market.

According to the new rule, companies whose dividend payout to shareholders is less than 30 percent of their net profit will have to publicly explain the decision. Companies that have dividend payment of 50 percent of their net profit will find it easier to get approval for refinancing on the stock market.

The reluctance of listed companies to pay out dividend is one of the main reasons behind the wild speculation on the stock market. Only a few investors stick to long-term value-based investment, partly because they cannot get much reward from corporate dividend payouts.

In this sense, the new rule will help build a market culture that values long-term investment. It is a welcome move, given the current slump in the benchmark Shanghai Composite Index, which has fallen by about 15 percent from a 2012 high in March.

In 2001, a regulation required that a listed company should pay out dividend if it planned to refinance. In 2004 and 2006, the regulator made it a mandatory rule and imposed a floor for dividend payout as a proportion of corporate profit. But the move failed to change the speculative mood of the market.

It is important to encourage companies to pay out dividend regularly. But it is more important to ensure people get returns from their investment in quality companies, though we still lack quality companies that consistently share the fruits of their business with their investors.

Instead, there have been scandals in which owners have got their companies listed by selling their shares at high prices. Investors who buy these shares often incur losses because such companies start performing poorly very soon.

Worse, a large number of new share sales and huge amounts of refinancing have flooded the market in recent years, causing a massive gap between what investors have paid and what they have got in return.

Policymakers need to weed those who cheat out of the market so that investors can have access to quality companies and earn profits from long-term investments.