China will adopt stricter standards for applicants of initial public offerings (IPOs) next year to ensure the better quality of its listed companies, the China Securities Regulatory Commission announced over the weekend.

The commission released a circular on the new standards on Sunday, which require domestic companies to finish their shareholding restructuring three years prior to sending in their listing applications, though exceptions are permitted for State-owned enterprises which transfer entirely into shareholding companies and under other situations allowed by the State Council.

Meanwhile, companies planning IPOs cannot have major managerial changes over the three year lead-up phase.

The new standards are to guarantee the independence of the listing arm of domestic companies and the integrity of corporate financial reports, said Dong Cheng, an analyst with China Securities Co.

Presently, China requires applicants for listing to first set up shareholding-structured companies, which have to generate a profit record over three years.

But some companies wanting to issue stocks as early as possible try to produce satisfactory financial reports. Fraud sometimes occurs during the restructuring, which can be difficult to monitor.

"The three-year timeline will make it hard for the listing applicants to evade regulations on their genuine financial status," said Dong.

The listing arm, or the shareholding company, has to be operating independently outside the parent company three years in advance, so it will be easier to trace its real performance.

The curb on the movement of some staff will also prevent companies from simply borrowing a shell for listing and then completely transforming, said Xu Hongyuan, deputy director of the State Information Centre's Development Department.

Moreover, the new rules also enhance regulations on affiliated trade of companies planning an IPO to check the infringement on smaller shareholders' interests by bigger shareholders.

For example, a 30 percent upper limit is set for the ratio of raw material purchases or product sales that stock issuers can make with affiliations of big shareholders.

All these will help ensure the quality of the newly listed companies, said Xu.

(China Daily September 23, 2003)