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Reforms seek to weaken IPO clique
By Louise Ho |
April 13, 2012, Friday
|
Print Edition
Print Edition
LONG-AWAITED rules to reform initial public offerings in China seek to put individual investors at the table when underwriters, brokerages and companies set the pricing of new share sales.
The China Securities and Regulatory Commission, in an attempt to restore confidence in the market, announced its proposed changes on April 1 and is soliciting public comment until April 18.
The new rules are meant to address widespread criticism that exorbitant IPO prices hurt the interests of small investors, who hold 80 percent of Chinese equities.
The average price-to-earnings ratio of new China A-shares issued in 2011 was 59, almost three times the P/E ratio of new Hong Kong equity offerings. New share sales in China are now priced by underwriters, major company stakeholders and brokerages - who all stand to benefit from a high IPO price.
One key proposal in the reform package would encourage underwriters to invite five to 10 individual investors to participate in the pricing process, which is now a cozy clique of institutional interests only.
Independent market analyst Pi Haizhou said on his blog on cs.com on April 6 that the proposed rules are only "a show pony" and actual protection for individual investors would be limited.
"Five to 10 investors cannot represent the views and interests of all small investors," he said.
IPOs in China are often characterized by high-flying prices, hefty "stag profits" for big investors who bail out on the first day of trading, and shares prices that quickly fall below their initial sale price.
The regulator also wants to increase the proportion of new shares that retail investors can buy during an IPO subscription from not more than 20 percent to at least 50 percent. The proportion available for institutional investors would be reduced from 80 percent to about 50 percent.
Another proposal would require companies with P/E ratios 25 percent or higher than the industry average to disclose pricing information and include risk advice in their prospectuses.
But is the idea of giving small investors a bigger role in the pricing process just window-dressing?
Liu Junwei, an analyst at Shenyin Wanguo, was quoted by sohu.com as saying that he doesn't think retail investors will have a big influence on the final pricing under the proposed new rules.
Since retail investors on a pricing panel would be recommended by underwriters, it is likely those chosen would be prone to doing what the underwriters want. Some are even suggesting the revised process might be open to bribery.
"The proposal cannot eliminate improper transfer of benefits and overpricing during an IPO subscription," said Zhang Qi, an analyst from research institute Zero2IPO in a research report on April 5. "Individual investors also may not have the ability to determine the right pricing for a new share."
Some individual investors welcomed the reforms but said draft rules won't have a big impact on the IPO market.
"There is no rule to restrain those with privilege, such as institutional investors, when a share price is set too high," individual investor Dong Wenyi said on Sohu Weibo on Wednesday.
In a letter to securities regulator Chairman Guo Shuqing on April 2, an unidentified investor said the suggested measures do not focus on the real problems in the stock market, such as defining what punishment listed companies face if they falsify information in their prospectuses.
Still, the market regulator is trying to show that the reform process is a serious one.
The Shanghai Stock Exchange yesterday held a mock IPO pricing trial run on Beijing Cuiwei Tower, a commercial property investment company seeking to go public. The trial included 100 retail investors from across the country. The results of the trial may be released soon.
It's fine for critics of the stock market to blame institutional heavyweights and government regulators for all the problems. But it's also time to ask: What can individual investors do to improve the market's performance?
Stock market analyst Ye Tan always advises individual investors to develop their own analytical skills and should not just follow the crowd in deciding which shares to buy.
Those who are truly unhappy with the way the market is operating now should take this opportunity to air their views on the reform proposals. Public comment is being accepted on the China Securities and Regulatory Commission's website at csrc.gov.cn.
The China Securities and Regulatory Commission, in an attempt to restore confidence in the market, announced its proposed changes on April 1 and is soliciting public comment until April 18.
The new rules are meant to address widespread criticism that exorbitant IPO prices hurt the interests of small investors, who hold 80 percent of Chinese equities.
The average price-to-earnings ratio of new China A-shares issued in 2011 was 59, almost three times the P/E ratio of new Hong Kong equity offerings. New share sales in China are now priced by underwriters, major company stakeholders and brokerages - who all stand to benefit from a high IPO price.
One key proposal in the reform package would encourage underwriters to invite five to 10 individual investors to participate in the pricing process, which is now a cozy clique of institutional interests only.
Independent market analyst Pi Haizhou said on his blog on cs.com on April 6 that the proposed rules are only "a show pony" and actual protection for individual investors would be limited.
"Five to 10 investors cannot represent the views and interests of all small investors," he said.
IPOs in China are often characterized by high-flying prices, hefty "stag profits" for big investors who bail out on the first day of trading, and shares prices that quickly fall below their initial sale price.
The regulator also wants to increase the proportion of new shares that retail investors can buy during an IPO subscription from not more than 20 percent to at least 50 percent. The proportion available for institutional investors would be reduced from 80 percent to about 50 percent.
Another proposal would require companies with P/E ratios 25 percent or higher than the industry average to disclose pricing information and include risk advice in their prospectuses.
But is the idea of giving small investors a bigger role in the pricing process just window-dressing?
Liu Junwei, an analyst at Shenyin Wanguo, was quoted by sohu.com as saying that he doesn't think retail investors will have a big influence on the final pricing under the proposed new rules.
Since retail investors on a pricing panel would be recommended by underwriters, it is likely those chosen would be prone to doing what the underwriters want. Some are even suggesting the revised process might be open to bribery.
"The proposal cannot eliminate improper transfer of benefits and overpricing during an IPO subscription," said Zhang Qi, an analyst from research institute Zero2IPO in a research report on April 5. "Individual investors also may not have the ability to determine the right pricing for a new share."
Some individual investors welcomed the reforms but said draft rules won't have a big impact on the IPO market.
"There is no rule to restrain those with privilege, such as institutional investors, when a share price is set too high," individual investor Dong Wenyi said on Sohu Weibo on Wednesday.
In a letter to securities regulator Chairman Guo Shuqing on April 2, an unidentified investor said the suggested measures do not focus on the real problems in the stock market, such as defining what punishment listed companies face if they falsify information in their prospectuses.
Still, the market regulator is trying to show that the reform process is a serious one.
The Shanghai Stock Exchange yesterday held a mock IPO pricing trial run on Beijing Cuiwei Tower, a commercial property investment company seeking to go public. The trial included 100 retail investors from across the country. The results of the trial may be released soon.
It's fine for critics of the stock market to blame institutional heavyweights and government regulators for all the problems. But it's also time to ask: What can individual investors do to improve the market's performance?
Stock market analyst Ye Tan always advises individual investors to develop their own analytical skills and should not just follow the crowd in deciding which shares to buy.
Those who are truly unhappy with the way the market is operating now should take this opportunity to air their views on the reform proposals. Public comment is being accepted on the China Securities and Regulatory Commission's website at csrc.gov.cn.
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