18 January 2020

POLICY WATCH: IPO resumption hinges on market reforms

Chinese firms may have to wait a while longer for the initial public offering (IPO) market on the mainland to be reopened as regulators aim to put in place key market reforms before approving any new listings.

The China Securities Regulatory Commission (CSRC) said at a news conference on Sept 27 that it won’t open the floodgates for new stock offerings until the IPO reforms are officially launched.

The IPO market in the mainland has been frozen since October last year due to volatility in the stock markets, concerns about the financial reporting of companies and poor performance of several newly-listed firms. There were also worries that a fresh influx of IPOs could further deteriorate the market sentiment.

However, from the perspective of investment banks and listing candidates, the IPO suspension has had negative consequences. Many companies were unable to raise funds for business expansion, which affected the overall capital market, the critics argue.

CSRC, which is currently under the leadership of Xiao Gang, a former chairman of Bank of China, admitted that long-term suspension of the IPO market not only discourages equity financing by enterprises, but also hampers the steady development of the nation’s stock market. However, it insisted that IPOs should not be rushed until key reforms are pushed forward.

The comments suggest that authorities will not step back from their stance on protection of investor interests. The regulator issued a preliminary draft to solicit opinions for more IPO reforms in June, with the main theme being ensuring better protection for the legitimate interests of investors, especially the small investors. Large-scale reforms were sought to be carried out on the current IPO system.

Focus will be placed on streamlining the relationship between the government and the capital market and letting all market participants fulfill their own duties, according to the draft. Penalties will be imposed on banks and their employees for including inaccurate information in a prospectus and for not fully disclosing risks.

Bankers could be penalized when the companies they underwrite post a drop of more than 50 percent in profit in the first year after going public. The regulator could suspend securities firms from equity underwriting, and bankers could be barred from filing new applications for as long as a year. Legal advisers and auditors also could be held accountable.

Currently, 83 IPO applications are said to be awaiting final approval from the regulator after reviews. The companies may raise a combined 55.8 billion yuan (US$9.1 billion), accounting firm Ernst & Young said in June this year. The candidates include Shaanxi Coal & Chemical Industry Group and China Postal Express & Logistics, according to information posted on the regulator’s website.

Fundraising from IPOs in China dropped 80 percent to US$14.4 billion last year from a record US$71 billion in 2010, data compiled by Bloomberg showed.

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EJ Insight writer