Institutions may face partial IPO lockout
Daniel Ren in Shanghai
Beijing plans to ban institutional investors from bidding for initial public offering shares set aside for the public lottery system in a move to give retail investors a better chance of owning stocks, sources said.
Stock exchange officials, investment bankers and government researchers have reached a consensus on the reform in the controversial initial public offering mechanism and are awaiting approval by regulators.
'The interests of small investors were highlighted during the discussions,' said an official who was involved in the study of the reform.
'A proposal has been submitted to the top regulators but no official reply has been given yet.'
The China Securities Regulatory Commission started to study changes in the system late last year when public investors vented their anger towards the woeful performance of PetroChina's listing.
The mainland's arcane initial public offering system - under which the shares are underpriced - ensures winners pocket handsome gains on the shares' trading debuts.
Currently, initial share sales are launched in two tranches: placement to institutions and the public offering. Normally, an offering's arrangers assign 30 per cent of the total shares for institutional investors, and the remaining 70 per cent to the public. The system greatly favours cash-rich funds, insurers and companies which can also take part in the public offering, which allots shares through a lottery, and outbid retail investors.
Under the so-called 'online' offering, all investors can apply for the 70 per cent with 1,000 shares per lot. Subscribers are given a number for the lottery based on the upfront payment tied up to the new shares. 'It is a game where money does all the talking,' said GF Securities analyst Zhang Wancheng. 'It's definitely unfair.'
PetroChina's debut on the Shanghai Stock Exchange in November jumped as much as 191 per cent in intraday trading, giving institutional investors handsome gains. However, the stock has since retreated as institutional investors dumped the share to lock in profits, while retail investors who bought shares later in the secondary market suffered losses.
The mainland's initial public offerings' first-day gain last year averaged 186.9 per cent.
Some researchers also proposed adopting a system mirroring some offerings in Hong Kong under which each subscriber will get at least one board lot. Sources said most people involved in the study voted for a ban on institutions from public offerings, adding that the system was easy to implement because it required only minor technical changes.