CHINA has introduced a new round of reforms for initial public offerings, aiming to improve market transparency and ease regulatory hurdles. Critics said the changes don't go far enough.

The China Securities Regulatory Commission issued a draft IPO reform plan earlier this month to solicit public opinions on an array of proposed changes related to offer pricing, distribution of new share sales and information disclosure.

The public consultation period has closed on June 21.

The new rules require IPO candidates to release prospectuses as soon as the CSRC receives their applications for stock listings. That would extend the time for public scrutiny of prospectuses.

Prospective issuers and their IPO managers will be required to schedule their IPOs within 12 months of receiving regulatory approval. That's an extension of the current six months. They will also be able to determine the price and allocations of their share offerings without regulatory interference.

"This round of IPO reforms is more market-driven than we expected," said CITIC Securities in a report. "The new rules will allow issuers to time debuts according to market conditions. The deregulated allocation mechanism benefits underwriters by giving them more decision-making power. That helps them to improve their bargaining ability and cultivate long-term relationships with institutional clients."

Currently, the CSRC requires IPO candidates with price-earning ratios 25 percent higher than listed industry peers to explain the pricing and disclose possible risks to investors. In addition, the regulator has the power to intervene if it believes the IPO price does not reflect market fundamentals.

The new plan also encourages issuers to offer bonds while their applications for share offerings are pending regulatory approval in an effort to diversify funding channels.

"The move will greatly reduce time costs and ease fund demand for enterprises while they are waiting for approvals, and it also helps to relieve financing pressure on the market," said Dong Dengxin, the head of the Finance and Securities Institute at Wuhan University of Science and Technology.

This is the fourth round of IPO reform since China introduced the sponsorship system for companies seeking public listings in 2004.

Under that system, a prospective listing firm was required to appoint as sponsor a qualified underwriter who would vouch for the truthfulness of information provided in a prospectus and oversee information disclosure of the stock issuer during the supervision period.

'Window-dressing'

At the time, it was considered a milestone in IPO reform. However, time has exposed its defects. Many sponsors were found to engage in "window-dressing" - using false or misleading information to tart up the profit and potential of IPO companies. That led to inflated issue prices and quick price crashes after debuts.

As of mid-June, 622 of 886 stocks that went public after June 2009 were trading below their issue prices, including 169 that have slumped over 50 percent, according to the Securities Times.

In order to tackle the problem of overpriced initial share offerings, the new rules empower retail investors, who account for about three-fourths of trading on the domestic stock exchanges, to participate in the pricing process - a privilege previously limited to issuers, underwriters and institutional investors.

According to the draft rules, issuers must collect quotations from at least 50 institutional and 50 individual investors during the pricing of IPOs involving more than 400 million shares. Quotations from at least 20 institutional and 20 individual investors are required for new listings below that amount.

The reforms also require IPO companies to provide measures to stabilize their share prices if they fall below net-asset value during the first five years after the debut.

One highlight of the proposed plan is that controlling shareholders, directors and senior managers of the prospective listing firm must promise not to sell their holdings at below the IPO price within two years after their lock-up periods end.

And the lock-up period will be extended for at least another six months if the price closes below the issue price for 20 straight days in the first six months of trading or if the closing price at the end of the first six months is lower than the issue price.

"This new mechanism will prevent issuers from setting lofty IPO prices and force them to optimize corporate management and improve profitability to drive up share prices," said Jim Li, an investment banker.

The proposed reforms also tighten scrutiny over IPO sponsors by setting forth severe penalties for those failing to carry out due diligence.

Under the draft rules, the CSRC will no longer accept IPO applications from sponsors of listed firms that have posted more than a 50 percent drop in profit or have reported losses in the first year after going public.

The array of proposed changes is impressive, but some market participants said they don't touch the root problem - the regulatory approval framework.

"The proposed changes are only technical amendments that don't address the approval system," said Huang Song, secretary general of the Research Center of Financial and Industrial Development at Peking University. "They treat symptoms but not the underlying problems of the stock market."

At the center of China's listing approval system is the CRSC's Issuance Review Committee, which has the absolute power to decide whether a company is qualified to go public.

The system has long been criticized for inefficiency due to the limited number of reviewers and its opaque vetting process.

Registration system

Many market participants and analysts have called for the committee to be replaced with a registration system, under which regulators would check only the validity of a company's information disclosure.

"What the regulator should do is to create a healthy and legal market environment, while investors should be allowed to decide which companies will survive," said Qi Lin, a 42-year-old retailer investor.

In response to criticism of the draft IPO reform plan, Yao Gang, vice chairman of the CSRC, said last week that "the IPO reform was designed to maximize the transparency of the IPO process within the scope of China's securities laws that set the legal basis of listing examination and approval."

"The CSRC alone can not achieve a thorough reform on the IPO system," said Wuhan University's Dong. "Only by transforming the current approval mechanism into a registration system can China's stock market become truly market-driven."