Just months before China’s once-in-a-decade reshuffle of its top leadership, securities regulators are speeding up reform of the country’s capital markets. The latest changes allow A-share issuers and their underwriters to set initial public offering prices directly or after preliminary price inquiry — a move that will simplify the process.
The new policy aims to improve the flexibility of the way IPOs are priced and encourage issuers and underwriters to adopt innovative pricing procedures. Companies and their bankers can also decide the lock-up period, the China Securities Regulatory Commission (CSRC) said on its website. The commission is reported to have met on Monday afternoon to finalise the new measures.
CSRC has stirred up China’s stock markets recently with a series of new policies that are designed to breathe more life into the country’s languishing equity market. The regulator had previously announced plans to cut transaction costs for equity transactions, tighten IPO information disclosure requirements and enforce the delisting of unqualified firms. CSRC’s reform-minded chairman, Guo Shuqing, had also expressed his determination to crack down on insider trading and require higher dividend pay-outs from listed companies.
“The new policy will simplify the IPO pricing process and allow issuers to best capture market windows,” said Liu Jun, an analyst at Changjiang Securities. “However, it will be a big test for issuers and underwriters. Prices will be based on how well they understand the market and investor sentiment.”
Until now, IPO bookrunners in China have been required to take about three days to conduct online and offline price inquiry before they submit a price-inquiry report to authorities and then wait for approval. That is a lot more complicated than the new rule, which allows prices to be set merely through discussions between issuers and underwriters.
China’s equity market is one of very few in the world that requires such a formal price-inquiry process ahead of an IPO. In Hong Kong, underwriters gauge investor interest through informal meetings before the bookbuilding kicks off.
CSRC has also abandoned the mandatory three-month restricted period during which investors are not allowed to sell their holdings. Instead, issuers and underwriters may directly set minimum holding periods.
Moreover, CSRC will allow qualified individuals to participate in the price-inquiry process and has now given retail investors more influence in deals, requiring issuers to sell at least 50% of newly issued shares to institutional investors and the remainder to retail investors.
Chinese companies traditionally allocate a large chunk of IPOs to retail investors; often as much as 90% of the total offering. It has become commonplace for the majority of investors to pay a price decided by a small group comprising institutional investors and underwriters.
The CRSC also said that a mechanism will be set up so that institutional investors can sell their shares to retail investors.
Still missing in the regulator’s new regulations are rules curbing excessive IPO prices. Guo has said the commission will address the issue of unreasonably high offering prices, but no concrete measures have been announced so far.