The central bank's recent introduction of two significant financial tools aims to bolster the stability and growth of the capital marketsThese initiatives, launched in October, include mechanisms for securities, fund, and insurance company swaps, as well as special re-lending for stock buybacks and increases in shareholdingsThe response from the market has been optimistic, signaling a resurgence from a period of stagnationInvestors and financial institutions are not only welcoming these measures but are also actively engaging with them.

As the market musicians struck a hopeful chord, brokerage firms and funds eagerly applied for swap facilitiesPublicly listed companies and major stakeholders, meanwhile, clamored for what they dubbed the "buyback loans" and "increased shareholding loans." This collaborative effort translates the central bank's support into tangible actions in the capital markets, revealing a coordinated response from multiple sectors.

While the enthusiasm around these new tools is undeniable, it is essential to critically assess their underlying structure and potential pitfalls

The “buyback loans” seem to harbor some intrinsic weaknesses, implying that the central bank, along with regulatory bodies, will need to pay closer attention to these aspects to ensure the effectiveness of their supportEnhancing the specificity of these policies could better enable financial markets and investors to reap the benefits of the central bank's initiatives.

The “increased shareholding loans” appear to be faring considerably better than their counterpartBoth these tools operate within the same framework of bank loans, where borrowers are obligated to repay the funds with an annual interest rate of 2.25%. However, the dynamics at play differ significantlyMajor shareholders can navigate market fluctuations to their advantage; they can purchase shares at a lower price and liquidate them at a higher priceThis strategy allows them not only to repay the banks but also to profit from the difference

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Furthermore, many publicly traded companies often offer generous cash dividends, which can sometimes exceed the 2.25% interest rateTherefore, major shareholders find themselves in a position where repaying “increased shareholding loans” becomes relatively unburdened.

Conversely, the “buyback loans” do not share the same favorable outlookCompanies that engage in share buybacks utilize the repurchased stocks for various reasonsFirst, the shares may be allocated towards employee incentive packages or stock optionsSecond, repurchased shares could be set for cancellation, subsequently reducing the overall capital of the companyThird, they could be earmarked for convertible bonds, or kept in reserve with the prospect of market resale under specific conditions.

However, examining the listed purposes of share buybacks reveals potential financial strains for companies utilizing “buyback loans.” In scenarios where shares are repurposed for stock incentives or employee ownership plans, the exercise price is often set at a nominal value or even zero

Such practices equate to giving away sharesIf proceeds from these transactions fall short of loan repayment requirements, the burden shifts back onto the companies, forcing them to compensate the shortfall from their own financesIn this context, “buyback loans” can morph into a liability rather than an asset.

A pivotal concern arises when considering the option of cancellationThis method of buyback, termed “cancellation-style buyback,” is perceived as the one most aligned with investor interests and, indeed, the approach that the market is keenly anticipatingHowever, when aligned against “buyback loans,” this strategy underscores one of the inherent flaws within the loan structureOnce shares are canceled, the funds utilized for the buybacks become non-refundable, including both the principal borrowed and the accrued interestThis raises a critical question: how can companies repay what they no longer possess?

For financial robust companies, repayment might not present an issue

However, those already experiencing liquidity concerns may find this a recipe for stress, potentially putting their financial health at riskThe intriguing paradox emerges: why would financially sound companies opt for “buyback loans” in the first instance?

Due to the cancellation route rendering the principal of the “buyback loans” non-existent, the risk of default on repayment grows substantively for financially strained companiesConsequently, even if they were to apply for “buyback loans,” many would strategically avoid using funds for cancellation-style buybacks, leading to less impactful outcomes regarding investor protectionThis predicament elucidates the critical shortcomings or “hard injuries” inherent in the “buyback loan” schemeIt is imperative that these nuances be addressed through effective policy modification, ensuring the central bank can offer precisely targeted support to the capital markets as they navigate their recovery pathways.

In summary, while the dual policy initiatives by the central bank create an environment of renewed positivity in the capital markets, careful examination of their structural challenges is essential