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SCMP Reporter

The CSRC's far stricter directive will also improve the quality of  listed companies

The mainland securities regulator has issued tighter guidelines to cap the size of initial public offerings (IPO) as China's stock markets wobble from a rash of new share offerings.

A new directive given yesterday served the dual purpose of slowing share issuances and improving the quality of listed companies in the mainland's rapidly expanding but speculative market, analysts said.

From next month, the China Securities Regulatory Commission (CSRC) will cap IPOs at no more than twice an issuer's audited net assets in the previous financial year.

This is the first time the CSRC has put caps on IPOs, although it has imposed ceilings on additional share offerings by the mainland's 1,259 listed companies.

From next year, candidates must also have been a joint stock company for at least three years before applying to launch an IPO.

Spared from this requirement, however, are state-owned enterprises and limited companies restructuring to list as a whole or issuers which have been granted exemptions by the State Council.

'The CSRC is sending out the signal that the regulator cares very much about the market and is trying to protect it,' a Xiangcai Securities trader said.

The benchmark Shanghai A-Share Index had lost about 16 per cent from this year's peak in April as share issues accelerated and policy uncertainties dented investor confidence.

Funds raised from A-share public offers ballooned from March's two billion yuan (HK$1.87 billion) to last month's 10.1 billion yuan, according to CSRC statistics.

Earlier this month, the regulator delayed the 10 billion yuan A-share IPO of Yangtze Electric Power, part of China's gigantic Three Gorges dam project, at the last minute for fear its close links to Huaxia Bank's 5.6 billion yuan fund-raising exercise on September 12 would put too much strain on the market.

The CSRC has been caught between the practice of shoring up the market during a downturn and dealing with a lengthening queue of IPO candidates approved for listings.

By insisting that listing candidates must have been a joint stock company for at least three years, the CSRC could reduce the backlog of new listings, Shanghai securities lawyer Yan Yiming said.

Although Chinese company law had long imposed such a requirement, the regulator had previously exempted listing candidates spun off from state-owned companies, which accounted for more than 70 per cent of mainland-quoted firms, China Southern Securities analyst Wang Yiguo said.

The stricter requirement would allow better assessments of listing candidates' corporate governance and ability to operate as independent entities, Mr Yan said.

The ceiling on the size of an IPO also responds to growing public discontent with the tendency of mainland companies to post falling profits or even losses within three years of going public.

The low costs of stock-market fund-raising had given mainland companies little incentive to pick projects carefully, analysts said.

As spin-offs, they are often heavily reliant on parent and connected companies.

A CSRC survey last year indicated about 79 per cent of mainland listed firms had connected transactions with their biggest shareholders. Major shareholders often treat their listed vehicles as piggy banks.

In response, the new directive requires connected transactions with controlling shareholders or their subsidiaries to account for no more than 30 per cent of an issuer's core operating revenues and raw material procurement.



Mainland watchdog limits size of IPOs