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More power for investors

Updated: 2013-12-06 10:03
By Gao Changxin in Shanghai ( China Daily Africa)

Listing reforms will bring order, reduce capital market fraud, say experts

By lifting the one-year freeze on initial public offerings, China has signaled that it is well on track for listing reforms that seek to give more power to investors, experts say.

In a guideline published on Nov 30, the China Securities Regulatory Commission, the market regulator, came out with "market-based" and "information disclosure-centered" measures that seek to bring law and order to the fraud-ridden IPO market.

At the same time, the regulator indicated that the ultimate objective of the reforms is to shift from the existing approval-based IPO system to a registration system. "It is an onerous job that needs to done in a gradual manner," the regulator said.

Though this is the fourth time that the regulator has revamped the IPO system since its inception in 1990, some experts feel that the current reforms do not have the widespread impact that the first three had.

At the same time some experts feel that the measures did not live up to the high investor expectations, especially after the Third Plenum's commitment on structural reforms.

Though the regulators have not made any firm commitments, indications are that the registration system for public floats would be implemented by 2020.

Under the existing IPO system, companies can float shares only after CSRC approval. That process can often take several years, posing huge problems for cash-strapped companies. The registration system, in comparison, allows a company to list shares as and when it sees fit, as long as it meets certain requirements.

The existing IPO approval system has often allowed brokerages, companies and big institutional investors to exploit and dupe, gullible investors. After suffering losses, many individual investors had opted out of the stock market. The number of stock market accounts dropped by 6 percent to 54 million in November this year from a high of 57.3 million in June, 2011.

The CSRC's latest reform plan, however, does offer some reasons to be excited as it seeks tough penalties for issuers and sponsors in case of irregularities. For example, a sponsor will be banned from the market for a year if the CSRC finds any false or contradictory information while reviewing a candidate's prospectus.

Measures have also been introduced to prevent companies from colluding with sponsors to fix the issue prices.

According to the guidelines, if a company's major shareholders plan to divest their holdings after the stipulated IPO lock-in period of two years, they will have to sell the shares at a price that is higher than the issue price. The two-year lock-in period will be extended by six months if the company's share prices are lower than the issue price for 20 consecutive trading days within the sixth month of the float.

At least three brokerages have been punished by the CSRC since May for lax due diligence on IPOs. Ping An Securities Co was fined and barred from underwriting for three months, while Minsheng Securities Co was warned and fined. Another firm, Nanjing Securities Co faced censure, while bankers associated with the three firms were served with life-bans.

An investment banker in Shanghai who refused to be named said that while it is good that the CRSC is cracking the whip, the punishments are too lenient, according to international standards.

"People go to prison for a long time in Hong Kong and New York for things that only cost you some fines in Shanghai. The price for wrongdoings was low and still remains low," says the banker, who wants to remain anonymous as he feels it is "inappropriate" to comment on regulators.

None of the wrongdoings listed in the CSRC's new guidelines, however, incur criminal charges, and are punished mostly with fines and market bans. According to Chinese laws, the CSRC does not have the power to prosecute and if it wants to press criminal charges, it needs to refer the cases to government prosecutors, who in many cases may not be familiar with the securities laws and regulations.

"The CSRC lacks the legal power to dish out punishments that are severe enough to serve as deterrents," says Zhang Qi, an analyst with the Shanghai-based Haitong Securities.

"Tough regulations and enforcement help foster a culture of responsibility and integrity among stock market practitioners."

The Securities & Futures Commission of Hong Kong, in comparison, is allowed to conduct thorough investigations and press charges by itself. In Hong Kong, insider trading is punished by up to 10 years in prison.

China, the world's largest IPO market in 2010 with a record $71 billion raised, hasn't had a single IPO since October 2012 as the CSRC cracked down on fraud and contemplated various reform measures.

The CSRC promised on Nov 30 to end the 14-month IPO hiatus and allow at least 50 companies to float shares by January next year. At the moment, over 760 IPO candidates have filed applications and the CSRC said it would take around a year for it to review all the candidates.

A total of 83 companies have had their IPO applications cleared by the CSRC and are waiting for IPOs. The companies may raise a combined 55.8 billion yuan ($9.2 billion), Bloomberg quoted a June estimate from global consultancy firm Ernst & Young as saying.

Experts, however, feel that the resumption of IPOs and reforms will have a sizable impact on the stock market.

The market took a hit on Dec 2 as investors sold shares on expectations that the new floats will drain liquidity from the market and drag down valuations.

The ChiNext Index, which tracks growth companies on the ChiNext board, plunged 8.3 percent on Dec 2, before making a 0.11 percent rebound the following day. The benchmark Shanghai Composite Index gained 0.69 percent on Dec 3 to 2222.67 points, reversing a 0.59 percent decline a day before.

Hong Hao, a researcher at the securities and futures research center of the Central University of Finance and Economics in Beijing, wrote in a column on news portal sina.com that IPO resumption will pressure the market in the short run, but prove beneficial in the mid-to-long term by reducing fraud.

The reforms will propel investors to value investment and avoid speculation, Hao says. This, he says, is something that could boost under-valued stocks on the main board. Bubbles in the ChiNext board will be punctured as investors migrate to the main board and under-valued stocks will lead the market to a volatile increase in the long term.

gaochangxin@chinadaily.com.cn

More power for investors

China's stock market took a hit on Dec 2 as investors sold shares on expectations that the new floats will drain liquidity from the market and drag down valuations. Lu Qijian / for China Daily

( China Daily Africa Weekly 12/06/2013 page22)

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