CSRC Draft Regulation on IPOs
February 8th, 2006Reporter Li Jing at 第一财经日报 (Diyi Caijing Ribao, China Business News) writes that the CSRC is circulating a draft revision to its IPO regulations.
According to the article, the draft defines more strictly how companies can meet the requirements of three years of continuous profitability and minimum cash turnover that are mandatory IPO conditions in PRC corporate law. The draft requires that certain kinds of non-ordinary course of business revenues be excluded from these metrics.
In a liberalization, the draft also explicitly allows for IPOs to consist solely of the sale of existing shares (rather than being the issuance of new shares, which has been customary practice).
The proposed revision to the PRC’s IPO regulations also call for companies to publish their draft prospectus on the CSRC website before the firm is reviewed by the Public Offering Review Commission (PORC ;-)).
The PORC was created as an ostensibly independent body to review IPO applications. The original regulations creating PORC announced they aimed to “increase transparency,” but ironically they required that the identify of members of the PORC be kept secret (prompting me to write a paper in graduate school about “secret transparency” in PRC securities regulation). Presumably the idea was that if the members of PORC were unknown it would be harder to bribe them. However, given the windfall that results from an IPO, issuers had strong incentives to find out who would review their IPO applications. In due course a CSRC staff member was arrested for taking bribes to reveal such information. The CSRC reversed course, requiring that PORC membership be disclosed, that meetings be announced in advance, and that the individual PORC members reviewing particular IPO applications make a declaration that they’d not been subjected to any improper influence. This new idea of requiring an IPO candidates to publish its red herring before PORC meets to review its application is presumably another attempt to discipline PORC; if everybody knows what PORC is reviewing, they will presumably be under greater pressure to make listing recommendations in accordance with law.
The draft also reportedly eliminates the 1-year coaching period IPO candidates are now required to undergo.
The PRC Company Law and PRC Securities Law were amended recently. The new versions came into force January 1. The draft regulation also reportedly addresses the problem of firms approved for an IPO under the old laws but which did not list before the new laws became effective. Such firms must meet the requirements of the new laws but do not have to go through the PORC review process again.
The article ends with a bland quote from some anonymous securities firm executive stating that the new rules will overall be good for the market, “especially for small investors.” Perhaps so, but wouldn’t it be nice if the CSRC publicly disclosed the draft regulations now so that small investors and not just the CEOs of securities companies could comment on them?
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