The mainland's securities regulator announced draft rules on Friday to improve the mechanism for initial public offerings (IPOs). That will pave the way for a lifting of its nine-month ban on new share listings, which could come as early as next month. The China Securities Regulatory Commission said it would solicit public opinion on the draft until June 5 and would resume new listings immediately after finalising the rules. According to the draft, the CSRC has promised to reduce 'administrative guidance' in setting IPO prices, and allow retail investors better opportunities for subscribing for IPOs. The draft rules will probably ignite sharp debates in the mainland media and internet chat rooms in the days and weeks to come, as the IPO mechanism has long been the key source of complaints by tens of millions of mainland investors. In the short term, the official intention to end the moratorium on new share sales is likely to make the stock markets in Shanghai and Shenzhen more volatile, as concerns over the imminent resumption of IPOs are likely to set off selling pressure. The increased volatility is likely to affect investment sentiment in Hong Kong. Although the CSRC said it would seek public opinion before announcing the new rules, public consultation of any official document is usually a formality, and the final rules are most likely to emerge without big changes. The draft CSRC rules intend to address the two most controversial issues in the IPO process, which have vexed retail and institutional investors alike. One is share subscription. Currently, this is done in two parts - offline subscription applies to institutional investors only, while online subscription, or the public tranche, is open to all investors. That has created a big disadvantage for retail investors because for a hot IPO, institutional investors who are not allocated enough shares in the offline subscription join retail investors in the online tranche. Because the online tranche is allocated through a lottery system, the more money one puts in, the better the chance of being allocated shares. This greatly favours cash-rich institutional investors. The draft rules will seek to remedy this by stipulating that institutional investors who subscribe offline will not be allowed to subscribe for the public tranche, and they will also cap the number of shares an investor may buy through the public tranche. While small investors are likely to welcome these stipulations, they may not feel the same way about the IPO pricing mechanism. According to the rules, the CSRC will strengthen efforts to 'form a more market-oriented pricing mechanism' while reducing administrative guidance on IPO pricing. Simply put, the regulator will continue to have the final say. This is ridiculous. It's bad not only for the regulator's image but also for Shanghai's efforts to become a financial centre, particularly at a time when the mainland is preparing to allow overseas companies to seek listings on the Shanghai bourse. Ever since the mainland's stock markets opened in the early 1990s, the central government has regulated every aspect of the stock markets with a heavy hand. Although it has relaxed its control in recent years, it still regulates the markets through its final say in IPO pricing and the timing and pace of IPOs. The officials' long-standing excuse is that the markets are not yet mature and they need to protect the interests of small investors, but the reality is that the government's repeated interference has created moral risks - making investors believe the government will bail them out if something goes wrong - and huge market distortions. For instance, investors have long accused the CSRC of deliberately underpricing IPOs so the stocks soar on their trading debut, helping feed the market frenzy and allowing insiders to make huge profits. Because the CSRC is focusing on the things that should have been left to market forces, it has done a very bad job of doing what it is supposed to do - crack down on insider dealing and other irregularities. As the combined value of Shanghai and Shenzhen markets is already the third-largest in the world, and mainland investors have become quite sophisticated, it is time for the CSRC to stop all the excuses and allow market forces to play their role.