THREE Chinese mainland fund managers have been forced to use money set aside in risk provisions to cover a combined loss of 22 million yuan (US$2.93 million) that resulted from a convertible-bond trading error, the firms said yesterday.
China Southern Fund Management, ABN AMRO TEDA Fund Management and Hua An Fund Management suffered the losses after they failed to convert bonds of Shanghai Electric Power Co into stock in a timely manner.
The bonds, issued in November at a face value of 100 yuan apiece, allowed holders to convert them into the company's shares at 4.43 yuan each between June 1, 2007 and December 1, 2011.
But a special provision authorized Shanghai Electric to buy back the bonds at 103.20 yuan each within this year if the firm's stock price traded at a 130-percent premium to 4.43 yuan for 30 consecutive sessions.
Shanghai Electric decided to repurchase all the bonds on August 15 after its shares soared enough to trigger the special treaty. The firm's convertible bonds closed at 266.58 yuan apiece on August 14, the last day investors had the option to covert the bonds into shares.
Five funds under the three money managers failed to sell the bonds or register to convert them on time, allowing the return to Shanghai Electric at the much lower price.
The fund ventures acknowledged yesterday that they had made a mistake in dealing with the convertible bonds and have used their risk provisions to cover the losses and protect investors' interests.
The fund management firms also said they have punished the people responsible for the mistake and will set up mechanisms to prevent similar events in the future.
Industry sources said earlier that the stock watchdog sent a notice to all mainland fund managers ordering them to learn a lesson from the losses of the three fund firms and increase risk controls.
The Chinese mainland's securities regulator in August 2006 started to require domestic mutual funds to set aside at least five percent of their monthly management fees as provisions to counter operational risks.
The money is supposed to be used to compensate investors for losses linked to technical glitches as well as crimes and other misconduct by fund managers.
Fund firms must open separate accounts for the provisions, with the capital limited to investments in low-risk and highly liquid bonds.