China’s securities regulator on Tuesday approved seven initial public offerings, the first under new listing rules introduced at the start of the year that are an important step towards a registration-based system.
Three companies – including Eastern Pioneer Driving School and Southern Publishing and Media Company – will list on the Shanghai Stock Exchange, according to a statement by the China Securities Regulatory Commission posted on its website.
Four other firms will go public in Shenzhen – either on the ChiNext board or on the Small and Medium Enterprise board.
Under the new IPO rules, retail and institutional investors can pay for the exact value of new shares after they secure them by lottery or by allotment. Previously, they were required to deploy much more capital for pre-ordering new shares that they might not get, which locked up huge amounts of capital ahead of each new listing.
Moreover, Chinese retail investors, who account for the majority of A-share trading, typically get allocated few new shares but typically seek to sell their holdings in order to participate in IPOs, a customary practice that can accentuate market volatility by drying up liquidity.
“By scrapping pre-payment for subscribing to new shares, huge amounts of capital will no longer be frozen, and the launch of new listings will not impact the market liquidity,” the CSRC said in the statement.
The securities watchdog announced the new mechanism in November last year, which it sees as “a major step” towards the long-awaited registration system. In the same month, it also lifted a four-month ban imposed on IPOs at the height of the country’s stock market rout.
Apart from dropping the upfront payments, the revised rules also give IPO candidates and their underwriters a bigger role in the process. The CSRC allows companies that sell less than 20 million new shares to “directly” determine the offering price.
Three companies of the seven, including Guangzhou Gaolang Energy Conservation Technology and Suzhou Institute of Architectural Design, will be eligible to set debut prices, according to the CSRC, although it hasn’t clarified whether their IPO valuations can exceed its unspoken ceiling of 23 times earnings.
All seven companies will have gone public before the Chinese New Year holidays, which kick off on February 7, with the pace of one IPO being launched each day, in an effort to secure a “safe operation” of the new mechanism, according to the regulator.
Registration system
China has pledged to overhaul the country’s current approval-based IPO system, which has been in place for more than two decades and heavily relied on stringent review by the securities regulator – it controls both the timing and pricing of new listings.
In late December, the country’s top legislature approved a proposal to shift to US-style registration-based system, paving the way for the CSRC to implement the changes in two years.
Such a registration-based mechanism would allow the market to play “the decisive” role in resource allocation, as well as lowering the listing threshold and simplifying the listing process.
Last week, CSRC spokesman Deng Ge said it wouldn’t come into place as early as on March 1, which was previously reported by domestic media.
“The reform of the registration system will be a gradual process. It won’t be achieved overnight. And it won’t result in a massive expansion in the new share listings,” Deng said at a briefing on January 13.
Analysts at Shengwan Hongyuan, a large Chinese brokerage, said they expected the new registration mechanism to be launched in the second quarter of the year at the earliest.
“The proposal on reforming the IPO system was approved within two weeks after it had been submitted. The leadership knows the urgency to launch the registration system,” they said in a note on December 28.
