Companies must carefully consider how IPO proceeds will be used
March 07, 2011 | BY
Janice QuPost-IPO share price drops may trigger new pricing rules
Issuers need to ponder their use of raised funds from initial public offerings (IPOs), particularly for over-raised funds, as this will likely become a key point in the approval of offerings when further reforms are carried out by the securities regulator.
According to recent media reports, the China Securities Regulatory Commission (CSRC) has vowed to launch a new round of reforms in response to the recent drop of new share prices. Step-by-step, some new rules will be adopted to rein in the over-valuation of IPO prices and improve the pricing mechanism.
Zhong Lin of Chen & Co said regulators are likely to more closely scrutinise the use of funds raised from an offering.
“Stock issuers who plan to make IPOs in the near future should be careful in their use of raised funds, especially preparations for using over-raised funds,” said the Shanghai-based partner. “It will become a crucial point in the examination of IPO applications and regulating of listed companies.”
Given the recent high issuance prices and high profit rations, Lin suggests that the raised capital should be used in the issuer's main business operations. For example, it could be used in the expansion of its distribution network or the development of new products, but “not for investment in the secondary stock market”.
“The lack of necessity of raising funds or unclear usage of raised funds will result in a 'veto' in IPO applications,” he said, as the use of raised funds is closely connected to the interests of the investors.
Lin also expects stricter supervision on the exercise of underwriter's rights, and its responsibilities in the price-inquiry process would be clarified and further enhanced.
In last year's October-issued Guiding Opinion on Intensifying Reform of the System for Offering of New Shares (关于深化新股发行体制改革的指导意见)and the Decision on Amending the Measures for the Administration of the Offering and Underwriting of Securities (关于修改《证券发行与承销管理办法》的决定 ), the CSRC attempted to improve the pricing process by enabling underwriters to take the interests of issuers and institutional investors into account, and by broadening the scope of book-building participants.
However, in recent practice Lin said the recommendation rights of underwriters were not being efficiently supervised and “this caused the IPO price of new shares to become unreasonably high, and soon after, they fell below their IPO price”.
Commentators expect that the pricing activities of institutional investors and underwriters will be open for stricter supervision and administration, and the participation of small-and medium-sized investors will expand. JQ
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