Why new reforms from CSRC could change the IPO market
May 18, 2012 | BY
clpstaff &clp articles &New Guidelines from the China Securities Regulatory Commission include vital reforms that will boost investors by increasing transparency
Top market regulator Guo Shuqing said at a forum in Beijing last week that his agency will use “rigorous measures” to clamp down on irregular practices, and that this will include amendments to the laws.
Guo made the comment following the release of Guidelines from the China Securities Regulatory Commission (CSRC) during the May holiday. The reform highlighted information disclosure and pricing control as the main concern as well as removing the lock-up period (the period of time after a company has gone public where company insiders or majority shareholders cannot sell any of their shares).
The Guidelines detail the separate liabilities of the issuer, sponsor, law firms and other intermediaries. The issuer is subject to a heavier burden of disclosure, while investors are likely to benefit from greater transparency.
“Investors will not be gambling on the limited information disclosed before as they now have ample information to analyse,” said Dai Guanchun of Zhong Lun Law Firm. “It is possible professional investors will be more specialised in certain industries instead of across the board as was the case previously,” he added. 
However, accurate disclosure does not mean listing all the possible risks. Dai highlighted the importance of risk appraisal.
“Issuers and sponsors should retain and cooperate with various experts, including legal, financial and technical, who are experienced with the rules and disclose the risks accurately,” he said.
Removing the one to three year lock-up period means listed companies are allowed to sell existing capital. Dai describes the move as a “breakthrough towards a more liberalised and liquid market”.
As part of an effort to control risk, issuers are required to further analyse any potential risks if their pricing earning ratios grow 25% higher than listed industry peers. Underwriters could also invite five to 10 individual investors to participate in pricing procedures.
The IPO Guidelines are part of a larger reform as the CSRC also unveiled a market-friendly measure to reduce the trading fee of A-shares by 25% to 0.0087 on both the Shanghai and Shenzhen stock exchanges. The new rule will take effect on June 1 and is expected to bring down the annual fees for A-share trading by about Rmb30 million ($4,744,000).
The two domestic exchanges also initiated a consultation to streamline delisting rules, which are designed to speed up the process and avoid companies taking advantage of loopholes. The proposals suggested eight new conditions, including three consecutive years of operating income below Rmb10 million.
“It is foreseeable that the market will shift from the heavy focus on raising capital for specified investment projects to accommodate investors who want to enable liquidity in their assets, or in other words, a multi-function equity market,” said Dai.
While uncertainties exist with any reform, greater disclosures and stricter obligations will help curb the high IPO pricing and restore confidence in the market.
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