New IPO pricing rules call for greater disclosure
November 09, 2010 | BY
Janice QuInstitutional investors can now participate in bookbuilding
To streamline listing and keep a tight rein on excessive valuations, participants in initial public offerings (IPOs) must be more transparent in the pricing process, say counsel.
The China Securities Regulatory Commission (CSRC) further reformed the IPO pricing mechanism by issuing new rules on October 13. The rules expand the participation of institutional investors in the bookbuilding process and strengthened disclosure requirements.
The new regulation, which will take effect on November 1, also puts forward restrictions on certain practices that may be related to inflating an IPO's valuation.
“By adopting these measures, it could prevent circumstances where high IPO valuations are run up by major bankers,” said William Zheng, a lawyer at the Hong Kong office of Blank Rome.
Citing Article 32, which sets the sales ratio of institutional investors, Zheng said that IPO prices would remain to be determined by market demand: “If there is a great demand for the stock, the high valuation might remain a reality.”
The rules allow underwriters to invite long-term institutional investors to join the price inquiry process. Further adding transparency to the IPO process, both issuers and underwriters are required to disclose their true assessment of stock values during the pre-marketing and road show stages.
Zheng points out Article 55, which “ensures that the issuer and its lead underwriter disclose the inquiry quotation involved by specific agencies”.
This disclosure information includes the conclusion of stock valuations, the comparable industry price-earnings ratio of listed companies as well as other equivalent indicators provided to the issuers during the road shows.
“All this translates to an ending result that the public will get a much better understanding of how the stock price is determined and who owns those shares,” he said.
Additionally, the CSRC is encouraging bourses and clearing agencies to streamline the listing process from their end. One suggestion from commentators is that stock exchanges could provide better access to market capital.
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