CSRC unveils IPO pricing regs
By Jiang Yan (Business Weekly)
Updated: 2004-12-13 10:32

China Securities Regulatory Commission (CSRC), the country's securities watchdog, announced late last Friday the new IPO (initial public offering) pricing regulation will take effect on January 1.

However, that does not necessarily mean the resumption of IPOs is a sure thing, experts said.

"Enforcement of the new pricing system is based on an administrative order, but whether companies will issue IPOs, or even whether CSRC will approve them, will depend on market conditions," said Han Yi, a senior independent market observer.

Zhang Gang, a senior analyst with Southwest Securities Research and Development in Beijing, said: "Market demand is the deciding factor ... CSRC will closely follow the market, looking for the right timing to approve the first batch of IPOs."

Even if CSRC gives the go-ahead, some companies will delay their IPOs if the market is sluggish market, as they will be concerned their shares might traded below IPO prices, he added.

For example, Shanghai Baosteel, which has received CSRC approval to list, is suspending its issuance of additional A shares, "because the time is not ripe," said Zuo Xiaolei, a financial expert with China Galaxy Securities Co.

Zhang said turnover is an important market indicator.

"If turnover increases in the next few weeks, IPOs will likely be launched."

However, the benchmark Shanghai composite index, which groups foreign currency B shares and domestic currency A shares, have been hovering around the 1,300- to 1,400-point mark for the past 11 weeks.

Some securities companies hailed the news, and said they were busy preparing to launch IPOs.

CSRC, in the days prior to implementation of the regulation, will train IPO issuers, sponsors and institutional investors, to ensure they are familiar with the new rules.

To be better prepared for the new pricing system, there will be no new IPOs by year's end, according to a CSRC official.

CSRC in July virtually stopped approving IPOs . On August 30, the commission announced the draft pricing regulation and officially halted IPO approvals.

However, CSRC still allowed the issuance of additional shares and convertible corporate bonds.

The regulation, the official said, signifies the establishment of a market-oriented IPO pricing system in China.

Public shareholders are excluded from CSRC's list of target trainees.

Under the new regulation, IPO applicants, after they receive CSRC's approval, must inquire about the share prices from at least 20 institutional investors -- for issuances that exceed 400 million shares, the number should be over 50 -- and the IPO price range and price-earning ratio will be based on the inquiries.

The new pricing system will benefit China's stock market in three ways, the CSRC official said.

First, the release and future adjustment of the new pricing system will improve China's stock listing mechamism.

Second, it gives institutional investors more say when setting IPO prices. More institutional investors will get involved, which will pump greater equity into the market.

At the same time, the sponsors will improve their internal corporate governance and put more effort into research and development.

However, if the new system reduces risks in the primary market, it may add risks to the secondary market, an investment banking official with a securities company in Guangzhou, who refused to be named, said.

There is still a possibility the listed companies and institutional investors may settle IPO prices under the table, which would harm the interests of secondary-market investors.

CSRC, while allowing institutional investors greater input, will exclude public investors from its training list.

Due to technical difficulties, including public investors would complicate the inquiry process and create unnecessary risks, the CSRC official explained.

"Institutional investors will be asked about the IPO prices because they can better evaluate the prices."

To protect the interests of public investors, CSRC last Tuesday announced, in Beijing, regulations aimed at empowering minority shareholders so they can influence the decision-making process of the companies in which they invest.

The regulations stipulate Shanghai and Shenzhen-listed companies must receive approval from at least half of the minority shareholders, during a shareholder conference, when deciding on issues -- including the issuance of new shares and convertible corporate bonds, major asset restructuring of the listed firms and the overseas listing of the firms' subsidiaries.

The firms must also make public the number of minority shareholder voters, their combined stockholding and the ratio of the shares in the listed company.

The rules will act as "transitional measures" before a deeper shareholding reform occurs, Tong Daochi, deputy director-general of CSRC's department of listed company supervision.

China's stock market is expected to reach a stable growth rate next year.

The Central Economic Work Conference, held in Beijing from December 3-5, recently announced prudent fiscal and monetary policies for next year.

"This will ensure the stable growth of our stock market," Zuo said.

"The domestic stock market will be a better barometer for the country's macroeconomic development, as those companies that contribute much to the growth will be listed after industrial restructuring."

The anonymous investment banking official said the domestic stock market has contributed greatly to the country's economic development, and has provided important financing channels and facilitated deepening financial reforms.

"The stock market must, and will, maintain stable development," he said.

In the past year, government support has played a vital role in helping the domestic stock market survive historical lows.

After the benchmark Shanghai composite index touched below the psychologically important 1,300-point mark in September, Premier Wen Jiabao urged relevant government departments to implement the State Council's guidelines on capital market development.

The index picked up almost immediately -- followed by other government policy support.

The government will continue this trend next year, analysts predict.

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