China will temporarily suspend initial public offerings until it finalizes new rules to price IPOs.
The China Securities Regulatory Commission, when releasing a draft of the new IPO pricing regulation on its website late Monday, said that to ensure fairness no additional IPOs will be allowed before the new regulation is formally enacted. The draft is still being reviewed, and it may be several weeks or more before it the finalized form is implemented.
The suspension will not affect additional share issues.
The new regulation introduces more market-driven practices and transparency into the flotation process.
The news triggered a rally at the bourses on Tuesday. The Shanghai composite index rose 1.72 percent to close at 1,342.06, reversing its downward track.
According to Dong Chen, a China Securities Co. analyst, the temporary suspension of IPOs does have a generally positive effect on the market, since it relieves near-term pressure on market expansion. He emphasized that it is only a short-term influence, as a number of companies are lined up to list once the IPO rules are finalized.
Dong said that in the long run, it is the reforms of the IPO pricing system that will be more meaningful to investors.
According to the draft, companies launching IPOs will have to make inquiries regarding share prices among institutional investors like fund managers, qualified foreign institutional investors and securities firms. Stock issuers and sponsors should also report price evaluations to these institutions.
The final IPO price ranges will be decided on the basis of the inquiries.
In the past, such price inquiries were not required. Many new share issues were overpriced, while secondary market investors had little influence on pricing.
Under the new regulation, which utilizes techniques introduced from overseas markets, institutional investors will have more say in the pricing process. IPO prices will be more reasonable and more favorable to investors, Dong explained.
The new rule will also amend the method of calculating earnings per share and is expected to present more accurate figures.
These changes will exert more pressure on the listing companies and sponsors while providing better protection to investors, and make IPO prices more accurately reflect the real value of the listing firms and market demand, a commission spokesman said.
“Some companies are inclined to treat the stock market as an automated teller machine and that is unfair to investors,” said Dong.
(China Daily September 1, 2004)
