CSRC Releases Stringent IPO Rules as Xiao Tackles Fraud

China’s securities regulator plans to restrict share issuers and major holders from selling their stock below initial public offering price as part of new rules aimed at cracking down on fraud and protecting investors.

The restrictions will be in place for two years after lock-ups end, according to draft rules the China Securities Regulatory Commission posted on its website yesterday. Issuers must also prepare and disclose plans to stabilize share prices that fall below net asset values within five years of their debuts.

The watchdog is seeking public feedback on the proposals by June 21.

New CSRC Chairman Xiao Gang, a former chairman of Bank of China Ltd., is extending predecessor Guo Shuqing’s campaign to combat fraud. Since Xiao took over in March, the regulator has dished out penalties including a three-month suspension of Ping An Securities Co.’s underwriting license for the firm’s role in the share sale of a fraudulent company in 2011.

Under the draft rules, when a company reports a net loss or a drop of more than 50 percent in profit in the same year as an IPO, the CSRC will stop reviewing any applications submitted by the investment bank that advised it.

The CSRC punished three brokerages and banned bankers from Ping An, Nanjing Securities Co. and Minsheng Securities Co. from the securities industry for life in the past month for failed due diligence in IPOs.

The CSRC also plans to change the IPO pricing system by letting individual investors who meet criteria set by underwriters participate in the placement process, previously limited to institutional investors, according to the draft rules.

12-Month Window

To make the IPO process more market driven, the CSRC plans to allow issuers 12 months to decide when to start trading after they receive regulatory approval for their initial sales.

Companies will also be able to apply to issue bonds while their IPO applications are pending regulatory approval, the securities watchdog said, as it encourages companies to explore fundraising options.

The securities watchdog’s issuance review commission has the sole discretion to decide whether a company is fit for a listing. Investment banks and their bankers must determine and guarantee the truthfulness of clients’ offering documents, financial performance, and proper corporate governance for as long as three years.

Bankers for companies listed on the main board may receive penalties including suspension of their licenses if the issuers’ financial performance doesn’t meet certain standards, or for various forms of misconduct on the part of the issuers.

Some companies raced to sell shares in Shenzhen, and particularly on the ChiNext board, in 2010 after companies such as Gumuzhen Bio-Technology Co., a fungus grower, and Walvax Biotechnology Co., a maker of vaccines, priced IPOs at valuations of more than 130 times earnings.