SHANGHAI－Some small-cap companies in China are trying to boost their low stock prices by requesting their employees to buy shares.

Already battered by the recent slump in mainland equities, such cash-strapped companies are even promising that executives, usually the chairman, will protect in-house investors from any potential losses.

At least 23 companies have offered so-called loss-free pledges this month. Most of them are listed in China's southern technology hub of Shenzhen.

Typically, company founders or executives pledge some shares owned by them as collateral to banks in order to raise finance. In case of a stock price downtrend, banks may invoke an agreement clause to either first warn the company concerned or liquidate the collateral in the open market, to cut losses.

Prices of shares in some small-cap companies are at levels last seen during the depths of the market slump in 2015, and could trigger either margin calls or liquidation.

The strategy of loss-free pledges appears to be paying off for some companies. Their shares rose an average 5.6 percent on the day, or the day after, such pledges were announced.

A uniquely Chinese take on the equity buyback, loss-free pledges can be a lifeline for companies with few other options, according to Credit Suisse Group AG.

Workers who buy shares in their employer must hold them for 12 months in order to be compensated, should the investment incur a loss, filings from a number of the companies show.

"Some shares have fallen to near levels that could prompt margin calls or liquidation by creditors, putting a great deal of pressure on stockholders and executives," said Chen Li, a Hong Kong-based strategist focused on mainland equity markets for Credit Suisse.

Loss-free pledges are a "smart move," he said, as they "send a positive signal and revive investor sentiment".

Agreed Yin Ming, vice-president of Baptized Capital, an asset management firm overseeing 200 million yuan of investments in Shanghai. "That's good news for speculators, who are attracted to the equities because short-term gains are "almost guaranteed".

"Management at these companies will strive to keep share prices above key levels, effectively setting a floor for the stock. They are very clever to have discovered this method, which requires nothing more than a verbal assurance to the market. People seem to be buying it, for now."

But this strategy is not benefiting all companies using it. On June 9, the day after offering its pledge, manufacturer Anhui Deli Household Glass Co found its shares slid 5 percent, the daily limit for companies subject to delisting warnings. The company was warned by the regulator in April after posting losses for two years.

Hong Hao, chief strategist at BOCOM International Holdings Co in Hong Kong, is not a fan of the loss-free pledge. It is just a quick fix that inflates valuations to a level that eventually comes back to haunt the companies, he said.

The average price-to-earnings ratio of the 23 companies that have offered the loss-free pledges this month is 85 times, well above the Shenzhen Composite's valuation of 27 times, data compiled by Bloomberg show.

"Such guarantees are pointless," said Hong. "Instead of shoring up stock prices, what the companies should really do is beef up their corporate management."

BLOOMBER