IPO rules move China towards investor driven market

To correct distorted subscription prices, the new rules will commit investors to purchase shares at a cost consistent with their initial proposal. This will help regulate the pricing process and achieve a final price that reflects the fair value.

It is unclear how much the CSRC will exercise its ultimate decision-making power when deciding whether to accept proposals on pricing, and how much discrepancy it will allow between issuers' methods of pricing for different sized IPOs.

But Chow maintains that the new rules will give market participants more flexibility. Underwriters may have more work to do though. “Now the onus is on the underwriter to make sure the price they ultimately set really reflects market,” he said.

Other changes require underwriters to cap online subscribers' allotment at no more than 0.1% of total available shares and prevent institutional investors from applying both on and offline for shares, giving retail investors much greater access to participate online.

Despite its latest effort to make the IPO pricing process more market sensitive, the government will retain the right to intervene in the final subscription price.

“If the deal is very hot the CSRC might be more sensitive,” said Chow. “These deals will put more pressure on regulators to ensure the final price really reflects market expectation.”

Chow told CLP he didn't expect significant change from the draft guidelines in the final rules, which were subsequently published on June 10 and became effective on June 11. See the July/August edition of CLP for a full translation.