China to Scrap IPO Upfront Payments From Jan. 1 in Interim Stepby and
New rules were first announced in November as halt lifted
Shift to registration-based system may begin as soon as 2016
China will scrap the upfront payment rule for initial public offerings from Jan. 1 as regulators seek to create a more level playing field for the country’s army of individual investors before the start of more substantial reforms.
The announcement Thursday by the China Securities Regulatory Commission confirmed plans first announced in November, when the regulator lifted a suspension on new share sales imposed at the height of a $5 trillion stock market rout.
China is switching to a new IPO system in part because the pre-funding requirement has been wreaking havoc on liquidity conditions in the nation’s financial system. Nearly every time a new batch of companies took orders over the past year, money-market rates climbed and the Shanghai Composite Index slumped as investors hoarded cash for their bids. The new rules may also increase participation by China’s 97 million individual investors, who are less likely to have money at hand for every round of bidding.
Chinese lawmakers this month cleared the way for laws to be changed as early as March for a switch to a registration system for IPOs, a more substantial reform than the end of the pre-funding requirement. China currently relies on the CSRC to act as a gatekeeper for offerings, with a seven-person listing-review committee examining each application. Under the new system, questions of IPO supply and timing would be left to companies and the market, rather than regulators.
The new registration regime would “thoroughly” change the investment-banking operations of China’s brokerages by giving them more power to determine IPO pricing and by boosting their business volumes, Huatai Securities Co. said earlier in December.