With the initial public offering (IPO) market in China reopening after a break of more than a year, listing candidates are facing tighter scrutiny from regulators over the pricing of the share issues and information disclosures.
To reduce the risks for investors, authorities aim to prevent overpriced flotations, with valuations to be guided generally in line with the average seen among listed peers. The move could help China avoid a repeat of the past when several firms launched high-priced issues and subsequently saw the shares crash on the market after listing.
The China Securities Regulatory Commission (CSRC), which had earlier promised a more hands-off approach to IPOs after resuming them earlier this month following a 15-month suspension, said on Sunday that it will step up monitoring of the deals and their pricing. In a statement on its website, the regulator said it will make random inspections on the procedures of book-building and marketing road shows.
In a clear indication that authorities have already stepped up their vigil, five listing candidates have decided to postpone their share sales. There is speculation that new rules have forced bankers and issuers to reconsider the planned deals.
Sunday’s announcement from the CSRC came after the market watchdog is said to have halted the listing of Jiangsu Aosaikang Pharmaceutical Co. Ltd., which announced Friday that it has delayed its IPO. The company had priced its shares at 72.99 yuan apiece, equivalent to 67 times the firm’s 2012 net profit. The valuation was deemed excessive, given that the average price-earnings ratio of pharmaceutical companies listed on Shenzhen’s ChiNext board was 55.31, the Shanghai Securities Journal noted.
In addition, there was criticism that the share sale of Aosaikang was coming mainly from the major shareholders, indicating that the funds to be raised in the IPO would go directly to the shareholders, rather than be used to develop the company’s business.
Amid this situation, observers had expressed fears that the IPO market will once again be used as an automated teller machine by listing candidates’ existing shareholders to realize windfall gains, instead of supporting the enterprises and the real economy.
The CSRC has denied that it has forced Jiangsu Aosaikang Pharmaceutical to halt its IPO, saying the decision was made by the company and the underwriter China International Capital Corp. However, market sources still believe that the regulator had pressured the drug maker to postpone its offer.
In its statement Sunday, the CSRC said it will stop IPOs and mete out punishment according to relevant rules if an issuer or lead underwriters are found to have used information other than what is disclosed publicly in the prospectus.
In addition, the issuer and the underwriters will be required to publish special statements in advance to caution investors against potential risks if the proposed IPO price points to a price-to-earnings ratio that is higher than the average PE ratio of the listed peers, it said.
Consulting giant PricewaterhouseCoopers has estimated that China’s IPO market could be worth up to 250 billion yuan in 2014. The CSRC lifted a freeze on new stock offerings at the beginning of this year, stressing that the reform mechanism would protect investors’ interests and prevent issuers from excessively raising funds to dilute their existing holdings.
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