New IPO rules and challenges for domestic funds

Perfecting price quotation mechanism and improving supervisory mechanism

The New Opinion provides that the price quotation shall be provided in good faith to reflect real market demand and the main underwriter shall adopt effective methods to avoid situations where a subscriber quotes a high price but then refuses to pay, or quotes a low price but then pays a higher price. The New Opinion also provides that issuers and underwriters shall set a minimum quota for each subscription at a reasonable basis subject to the amount of shares to be issued and market environment.

Improving online subscription system

Subscribers shall use either the online or offline subscription system but not both to acquire new shares. While individual investors have only ever been allowed to use the offline system, this is a significant challenge to institutions such as fund managers which had been entitled to use both the online and offline systems to acquire IPO shares.

Imposing online subscription cap

Under the New Opinion, issuers and underwriters shall fix a subscription quota for a single online subscription account on a reasonable basis subject to the amount of shares to be issued and the prevailing market situation. Such quota shall not exceed 0.1% of the total shares accessible through the online subscription system.

Improving risk disclosure

Issuers and underwriters shall issue a special risk disclosure announcement in order to fully disclose risks related to the primary market. In addition, institutions that engage in trading securities shall also take measures to disclose such risks to all investors and subscribers.

New Opinion objective

Under the New Opinion, a single investor is only allowed to use one account to subscribe for newly issued shares. Prior to the promulgation of this New Opinion, and according to China Securities Depository Clearing Corporation regulations, each securities firm and fund may open multiple accounts for securities trading. This gave institutions much easier access to IPO shares than individual investors.

By imposing the abovementioned restrictions on institutions, the New Opinion aims to allow more individual investors to access IPO shares. Many fund managers believe those fund products that have been benefiting from new share subscriptions may no longer enjoy the same stellar performance and high profits due to enforcement of the new provisions. This could eventually affect the fundraising performance of those fund products.

Unexpected ending for first IPOs

Following the release of the New Opinion, the CSRC restarted IPOs on the Shanghai and Shenzhen stock exchanges. The first IPO since September 2008 will be Guilin Sanjin (桂林三金), which started online and offline subscriptions on June 29.

The total amount of capital for online subscriptions to date is approximately Rmb425 billion (US$62 billion). But this is with an allotment rate of only 0.17%, which is much lower than the expected 0.5%. According to media reports, the low rate is due to incorrect anticipation of the number of online subscription accounts – the anticipated number was around 400,000 to 1.6 million, but there turned out to be more than 3.37 million accounts.

It is interesting to note that the domestic media has reported that a number of intermediary agents are now engaged in the leasing of an ID number in order to open an ID number account to subscribe for new shares. The annual rental for such an ID is Rmb500-1,000, which may explain the increased number of online subscription accounts.

Improved supervisory mechanisms expected

The CSRC intends to allow individual investors to access IPO subscriptions. However, due to the large number of ID number accounts, this legislative intent is faced with an unexpected challenge. Officials have said that, while the first new IPOs may not fall within their expectation, they do expect the objective of the New Opinion to be achieved in due course with the improved supervisory mechanisms.