Legislative approval paves way for fundamental shift in stock listings

After Chinese lawmakers gave the nod to stock listing reform in December, the State Council took a step closer to establishing a registration-based IPO system. Many experts believe the registration-based system will make the IPO process more transparent, which will aid the healthy, long-term development of the domestic stock markets. The proposed registration-based IPO system will differ markedly from the current "approval-based" process. Along with making the process more transparent, the new system also aims to make it faster and more efficient, in large part to cut down on the backlog of companies waiting to get listed.

On December 27, 2015, Chinese lawmakers authorize the State Council to roll out the registration-based IPO system. The authorization is to take effect on March 1, 2016, after which the State Council will have two years to change the current system. Photo: CFP The China Securities Regulatory Commission (CSRC), the country's securities regulator, is expected to release specific operation plans for the registration-based share listing system this month, according to a report posted on the financial news portal cnstock.com on Thursday. Chinese lawmakers approved the State Council's proposal to launch a registration-based IPO system on December 27, 2015, paving the way for the implementation of long-expected registration-based system. The CSRC said the change will mark a fundamental shift in securities regulation. The decision made by the National People's Congress Standing Committee will take effect on March 1, 2016. With the legislative approval, the State Council will have the right to change the listing system on the Shanghai and Shenzhen stock exchanges from the current "approval-based" as early as that date, and for two years after. However, the legislative approval doesn't mean the registration-based system will be up and running on March 1, Deng Ge, the CSRC spokesperson, said at a regular news briefing on Friday. Deng said the CSRC is currently drafting regulations for the system and will release them for public comment. The registration-based system first came up at the end of 2013, after the Third Plenum of the 18th Communist Party of China Central Committee issued plans for comprehensive reforms, including financial reforms. The new system is expected to change the current IPO process, which has been criticized for its complexity and strict requirements, said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology. The complexity of the process has amounted to real world problems. Currently, more than 600 companies are waiting for the CSRC to approve their IPOs. However, it will take time and effort to shift to the new system without disrupting the market. China's securities regulator announced on December 31, 2015 that a set of new IPO regulations would take effect on January 1, 2016. For example, under the new IPO mechanism, investors won't need to pre-pay capital during the IPO subscription process. In addition, the authorities will also simplify the approval procedures. More IPOs Under the current new share listing system, companies have to undergo a complicated IPO application process that sometimes takes years and multiple rounds of review to complete. For instance, underwriters have to file the pricing and share allocation plans for IPOs to the CSRC for approval. The CSRC plays a role in deciding the IPO's date and the amount of money the company can raise. Switching to the registration-based system will relieve the CSRC of its responsibility as the IPO gatekeeper. The stock exchanges will take over approving IPOs. The CSRC will be responsible for examining the qualifications of the applicants, but it will be the capital market that decides the company's value and assesses the potential investment risks. "Under the registration-based system, companies will have an easier time getting listed on the A-share market, which could draw better-performing enterprises to list domestically," said Qian Jin, PwC China Assurance Partner. "It's also possible that good Chinese companies that have listed overseas, such as Alibaba Group Holding, will return to list on the domestic stock markets." Indeed, some of China's fastest-growing companies decided to list overseas because it is easier. Alibaba went public on the New York Stock Exchange in 2014. Baidu Inc is on the Nasdaq Stock Market, and Tencent Holdings on the Hong Kong market. Acceleration of the registration-based system will further open up and enhance the A-share market, PwC China said in report on January 4, 2016. Although authorities suspended IPOs from July to November in 2015, the domestic IPO market more than doubled in size from 2014 to 2015, reaching 158.6 billion yuan ($24.06 billion). A total of 219 companies went public on the Shanghai and Shenzhen stock exchanges in 2015, up from 125 in the previous year, the report said. In 2016, China's new IPOs are expected to raise 250 billion yuan to 300 billion yuan, with the number of IPOs hitting an estimated 400, the report said. If those figures come to pass, China will have the largest IPO market in the world. Some investors are concerned that looser regulations will lower the quality of companies that get listed on the domestic markets, exposing investors to junk stocks. The CSRC has repeatedly stressed it will retain some oversight over the market. "Rather, it means the supervision system will also be reformed," Dong told the Global Times on Monday. "Under the registration-based system, new IPOs will be more efficient. And the delisting requirements will also be stricter." "The core of registration-based system is to improve information disclosure so that issuers and intermediaries can shoulder most of the responsibility for verifying the accuracy and completeness of the disclosed information," Dong said. "The regulator will issue stricter punishing regulations to control risks. For instance, if information disclosures are determined to be misleading, issuers will be required to buy back shares." Investors are concerned that the market will be swamped with new share listings, but Qian and Dong said the registration-based system will not have an immediate effect on the stock markets. Shell companies Due to the complicated IPO process, some well-performing companies have gone public by purchasing listed "shell companies". Shell companies refer to those already listed on the A-share market but are underperforming. They wait to get bought by other companies that hope to list on the A-share market. The process is called a "backdoor listing." That's why some investors buy junk stocks, said Zhang Xin, a senior analyst from Guotai Junan Securities. It is a bet that a shell company's stock price will jump in value once another company decides to buy it for a backdoor listing. Zhang told the Global Times on Wednesday that price of a junk stock can rise significantly once it is targeted for a backdoor listing. After the five-month suspension of IPOs in 2015, the growing demand for shell companies helped push up their stock prices, Dong said, noting that the new system should cool down the market for shell companies. But Zhang said it will be difficult to completely eliminate the practice because companies will still choose to do a backdoor listing if it costs less than an IPO under a normal application process.