China’s securities regulator unveiled on Saturday a long-awaited reform plan for the nation’s initial public offering (IPO) system, sparking hopes for a revival of new listings soon and lifting the prospects of financial services providers.
The new rules will foster a market-driven IPO system and help boost transparency, the China Securities Regulatory Commission (CSRC) said in a statement on its website. The regulator will reduce its role in approving the IPO applications while strengthening its efforts in monitoring the listed firms and investigating those with problems, it said.
IPO sponsors, law and accounting firms and asset appraisers will bear more responsibility to ensure that all essential information about the listing candidates is publicly disclosed, the CSRC said. They will have to compensate investors if the listing candidates cause loss to investors, it said.
The market watchdog said it will publicly announce the integrity records and operating situation of the financial services providers. Meanwhile, it will prohibit IPO candidates from inflating their valuations and share prices while preventing investors from undue speculation in newly-listed stocks.
In institutional placement, listing candidates should grant priority for some public securities funds or funds managed by the National Social Security Fund, giving them at least 40 percent of the offer shares. If the funds do not take up the offered shares, the sponsor can place them to other investors.
Institutional placement should represent at least 60 percent of total offer shares for candidates with a share capital less than 400 million yuan (US$65.25 million) and 70 percent for those with a share capital more than 400 million yuan.
Sponsors will be suspended from launching other IPO deals if a firm taken public by them previously records more than 50 percent decline in net profit or posts a net loss in the following fiscal year after listing. Entities found to have committed fraud will see their capital frozen.
The latest tough rules can help China set up an efficient, market-driven and transparent IPO market, which can support the expansion plans of many small and-medium-sized enterprises, observers say. It will also create a new funding source in the market as many private-equity firms, which had invested in some pre-IPO deals, are suffering from weak cash flow due to the halt of IPO approvals since early last year.
While the reform is good news overall, the A-share markets are likely to come under some pressure in the near term on worries that the upcoming new listings will drain liquidity.
The CSRC had stopped approval of IPO applications since early last year as share prices of many newly-listed firms fell below their offer prices amid poor financial performance of the firms. About 700 candidates are now said to be in the queue for listing in the A-share markets.
The IPOs could resume in January with about 50 firms reportedly ready to go public soon.
Pilot program for preferred stock issuance
China will launch a pilot program for preferred stock issues by both listed and non-listed companies, the China Securities Journal reported Monday, citing guidelines released by the State Council. The CSRC has said it will seek public views on the draft rules before their official release. Under the guidelines, preferred stocks issued by companies cannot exceed 50 percent of the total common shares, and fund-raising should not surpass 50 percent of the companies’ net assets before public listing, the paper said.
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