Guiding Opinions on Further Reforming
the Issue System of New Shares
According to the arrangements of the Chinese Communist Party Central Committee
and the State Council for economic work in 2012, reforming the issue system of new
shares is one of the major tasks for improving the capital markets. The major contents
of this reform are: on the basis of reducing administrative interventions over the last
two years, to improve the fundamental rules for the share issues of joint stock limited
companies and the listing and trading of their shares; urge various market participants
to further duly play their roles; promote true reflection of the value of a company in
its share prices; realize the balanced, coordinated and sound development of both the
primary and the secondary markets; and tangibly protect the lawful rights and
interests of investors.
I. Improving rules, clarifying responsibilities and strengthening true, accurate,
sufficient and complete information disclosure
An issue system focusing on information disclosure shall be further developed, and
reliance on the regulatory authority's judgments on the profitability of companies to
be listed shall be gradually reduced. The relevant rules shall be amended and
improved. The issue conditions and information disclosure requirements shall be
improved. Issuers and intermediaries shall actually assume their independent
responsibilities. The quality of information disclosure shall be raised from multiple
angles in the whole issue process. Issuers and intermediaries shall perform their duties
in accordance with laws, regulations and rules and may not whitewash poor business
performance of applicants. They shall state matters not clearly required by laws,
regulations and rules under the principles of good faith and professionalism.
1. Issuers, as the first persons responsible for information disclosure, must always
strictly adhere to the rule of conduct of good faith. Their basic obligations and
responsibilities are to provide sponsors, accounting firms, law firms and other
intermediaries with true and complete financial accounting data and other information
and provide full cooperation with intermediaries in due diligence. Controlling
shareholders and actual controllers of issuers may not take advantage of their
controlling status, affiliation or any other conditions to require or assist issuers to
fabricate information or conceal important information.
2. Sponsors shall comply with business rules and industry standards, act in good faith,
and diligently fulfill their duties. They shall conduct due diligence regarding the
information disclosed by issuers including application documentation and prospectus,
urge issuers to make full and objective disclosure of their basic information and risk
factors, and conduct necessary verification of the professional opinions issued by
other intermediaries.
3. Law firms shall strictly comply with professional ethics and practicing disciplines
for lawyers, diligently perform their obligations of verification and validation to fully
and objectively disclose relevant information on the legal existence, compliance,
problems and risks of issuers, and assume responsibility for the truthfulness, accuracy,
sufficiency and integrity of the documents issued by them. Preparation of
prospectuses by qualified law firms shall be encouraged.
4. Accounting firms shall establish review and other quality control rules and
procedures as needed for business quality control. Certified public accountants shall,
when conducting audit, strictly comply with their code of practice and the quality
control rules of their respective accounting firms, ensure due execution of important
audit procedures such as risk assessment, maintain rational professional skepticism,
maintain sensitivity to abnormal financial information, and prevent frauds, profit
manipulation and other acts of the management. Accounting firms and their signature
certified public accountants shall issue audit reports, review reports or other assurance
reports in strict accordance with their code of practice.
5. Asset appraisal institutions, credit rating institutions and other intermediaries shall,
in accordance with the requirements of relevant laws, regulations and codes of
practice, strictly fulfill their duties, conduct reviews and make judgments
independently, and issue professional opinions.
6. For better quality of financial information disclosure, the responsibilities of issuers
and their controlling shareholders and actual controllers, accounting firms and
sponsors in the provision of financial accounting data, audit practice regulation,
guidance, due diligence and other respects shall be further clarified, and any form of
whitewashing shall be resolutely prohibited.
7. Issuers shall establish a sound corporate governance structure, improve their
internal control rules, and establish a mechanism for effectively protecting the lawful
rights and interests of shareholders, especially minority shareholders. In a prospectus,
an issuer shall disclose in detail the operation status of its corporate governance
structure. Sponsors, law firms and accounting firms shall, in view of their guidance,
review and other work, offer opinions on the effectiveness of the corporate
governance structures and internal control systems of issuers.
8. Earlier prior information disclosure for an issue of new shares shall be required,
and the prior disclosure of the prospectus immediately after acceptance of an issue
application shall be realized gradually to increase transparency and strengthen
oversight by public investors and all communities.
9. At the stage of soliciting opinions from relevant ministries and commissions of the
state in the process of listing of companies, the manners of soliciting opinions from
relevant ministries and commissions shall be improved according to the requirements
of the State Council for reforming the administrative approval system, including
reducing interventions in microeconomic activities and raising the efficiency of
government services, under the premise of ensuring more and better disclosure of
relevant information.
10. After an issue application is approved, the issuer and the lead underwriter shall,
within the period of validity of the official approval document, choose the time of
issue at their discretion.
II. Appropriately adjusting the scope of price inquiry and allotment ratios and further
improving the pricing restraint mechanism
1. The scope of inquiry participants shall be enlarged. In addition to the seven
categories of institutions set out by the current rules, the lead underwriter may
independently recommend five to ten individual investors with relatively rich
investment experience to participate in the offline inquiry and allotment. The lead
underwriter shall establish the recommendation principles and standards and the
internal decision-making procedures, which shall be submitted to the Securities
Association of China for recordation. Issuers, shareholders of issuers and
intermediaries may not take advantage of affiliation or any other relationship to
illegally convey interests to the individual investors recommended or instigate the
individual investors recommended to raise issue prices.
2. The share allotment ratios for offline investors shall be raised, and the mechanism
of claw-back from offline offering to online offering shall be established. The share
allotment ratio for offline investors shall generally not be lower than 50% of the
shares in the current public offering and transfer (hereinafter referred to as the “shares
currently offered”). The issuer and underwriters shall claw back 10% of the shares
currently offered from offline to online offering if the odds for offline subscriptions
are higher than the odds for online subscriptions by two to four times; or claw back
20% if higher by more than four times.
3. Institutions participating in price inquiry are urged to prudentially set prices.
Participating institutions shall strictly implement internal control rules and investment
management business rules and further improve professionalism and standardization
of pricing. Participating institutions shall carefully study the prospectus and other
information on issuers and, when discovering any abnormal circumstances, such as a
bad credit record of an institution or individual related to the current share issue, any
unfavorable changes in the sector of the issuer and an abnormal profitability of the
issuer as apposed to the average sector profitability, conduct further verification in
such manners as investigation, research and check-up. If they are unable to verify the
relevant abnormal circumstances or have no sufficient time to full understand or study
the data and information on the issuer, and there is a high degree of risks in
participating in the pricing and subscription, they shall maintain sufficient prudence.
4. Regulation of the price inquiry and pricing processes shall be strengthened.
Underwriters shall retain the relevant data arising from the price inquiry and pricing
processes and archive such data for future reference, including but not limited to
promotional and publicity materials and road show live recordings, to truthfully and
fully reflect the price inquiry and pricing processes. The China Securities Regulatory
Commission (CSRC) and the Securities Association of China shall strengthen routine
inspection on the price inquiry and pricing processes as well as data archived and take
regulatory measures against exaggeration in publicity, false advertising and other acts
of issuers and underwriters.
5. Risk assessment and analysis by independent third parties regarding information
disclosure by companies to be listed shall be introduced to provide references for
small- and medium-sized investors subscribing to new issues. The Securities
Association of China shall organize the relevant specific work on risk assessment and
analysis for new shares.
6. Securities exchanges shall organize mock price inquiry for new shares among
small- and medium-sized investors to promote their study and awareness on new
shares and guide them in making rational investment.
III. Strengthening regulation of issue prices to urge issuers and all participants to
fulfill their duties
1. An issuer may, after the prior disclosure of a prospectus, preliminarily
communicate with specific inquiry participants in private regarding their pricing
intents to estimate an issue price range and shall submit a written report to the CSRC
before a meeting of the CSRC's public offering review committee is convened. Where
the price-to-earning ratio based on the estimated issue price is higher than the average
price-to-earning ratio of listed companies in the same sector, the issuer shall, in both
the prospectus and the issue announcement, additionally state the relevant risk factors,
explain the reasonability of the quantity of funds raised and whether there is any
misunderstanding as a result of its statements or acts, and alert the investors to the
relevant major matters. Where there is no detailed average price-to-earning ratio of
the relevant sector, reference shall be made to the average price-to-earning ratio of the
sector on the secondary market.
According to the estimated issue price, if the expected amount of funds raised exceeds
the demand of the investment projects for the funds raised, the issuer shall
additionally state in the prospectus the application of the excess of funds raised and its
impacts on the company; if the funds raised are not sufficient for the investment
projects, the issuer shall reasonably determine the measures for making up the fund
deficit and additionally disclose them in the prospectus.
2. After the formal disclosure of a prospectus, if the price-to-earning ratio based on
the issue price determined according to the price inquiry results is higher than the
average price-to-earning ratio of listed companies in the same sector by 25% or more
(also applicable to pricing in other methods), the issuer shall convene a meeting of its
board of directors to, in consideration of other pricing methods suitable to the
company, analyze and discuss the reasonability factors and risk factors for
determination of the issue price and further analyze and predict the contribution of the
use of the funds raised to the main business of the company as well as impacts on the
performance of the company, especially the risk factors for fluctuations of the
absolute and relative performance indictors of the company; and additional disclosure
of relevant information shall be made. The board of directors shall confirm the final
determination of the issue price, and independent directors shall express their opinions
on the sufficiency of deliberations by the board of directors. The issuer shall, within
two days after the meeting of the board of directors is convened, disclose information
on prices offered by inquiry participants, resolutions of the board of directors and the
opinions of independent directors.
The CSRC may, after a comprehensive consideration of the relevant information
including additional information disclosures, require an issuer and underwriters to
conduct price inquiry again or require an issuer which fails to provide a profit forecast
to additionally provide and disclose to the public a profit forecast report reviewed by
an accounting firm and conduct price inquiry again after the profit forecast is
disclosed to the public. If any material event occurs after the meeting of the CSRC's
public offering review committee, the CSRC will, in accordance with relevant
provisions, make a decision on whether to refer again the application to the public
offering review committee for approval; and if it is necessary to do so, new price
inquiry and other relevant affairs shall be handled after the public offering review
committee grants the application.
IV. Increasing the quantity of tradable shares of new listed companies to effectively
ease shortage of share supply
1. The existing 3-month lock-up period for shares allotted offline shall be removed to
raise the liquidity of shares of new listed companies, which, however, does not apply
to any lock-up periods as independently agreed upon between an issuer and
underwriters and the investors.
2. In an initial public offering (IPO) of new shares, transferring a portion of pre-IPO
shares to offline investors shall be encouraged to increase the quantity of tradable
shares of new listed companies. Shareholders each having held shares for three years
or more may transfer part of their pre-IPO shares to offline investors. After transfer of
such pre-IPO shares, the actual controller of the issuer may not change. Where a
shareholder chooses to transfer a portion of its pre-IPO shares, the names of such
shareholders and the quantity of shares to be transferred shall be disclosed in the
prospectus.
3. The funds from transfer of pre-IPO shares must be deposited in special accounts
and subject to supervision by sponsors. During the lock-up period for funds from
transfer of pre-IPO shares, if the share prices on the secondary market are lower than
the issue price, the funds in such special accounts may be used to repurchase shares of
the company from the secondary market. Where the controlling shareholder or actual
controller or any of its affiliates transfers any pre-IPO shares held, such a shareholder
may transfer out 10 percent of the balance of funds deposited in the special account
after one year from the public trading of the new shares; 20 percent after two years;
and the entire balance after three years. Where a non-controlling shareholder or a
non-actual controller or any of its affiliates transfers any pre-IPO shares held, such a
shareholder may transfer out the funds deposited in the special account after one year
from the public trading of the new shares.
Securities exchanges and China Securities Depository and Clearing Co., Ltd. shall
develop relevant rules and conduct supervision.
V. Continuing to improve regulatory measures for speculation in new shares to
maintain the normal trading order of new shares
1. Securities exchanges shall, based on market circumstances, improve after research
new share trading mechanisms and opening price formation mechanisms to promote
rational pricing and normal trading of new shares after initiation of public trading.
2. Securities exchanges shall clarify the standards for determining abnormal trading of
new shares, strengthen regulation of new shares at the early stage of public trading,
and strengthen regulation of speculation in new shares.
3. The investor eligibility management shall be strengthened. Both the Securities
Association of China and securities exchanges shall develop self-regulatory rules for
investor eligibility management, require their members to actually implement the
relevant requirements on investor eligibility management, and strengthen the
eligibility management of clients buying new shares.
4. The management of accounts for subscription to new shares shall be strengthened.
Securities companies shall check up and manage securities accounts opened by
investors, especially institutions investors, in respect of institutional attributes and
business characteristics of investors, to strengthen monitoring and regulation of
speculation in new shares, speculation in shares of companies with poor business
performance and speculation in small-cap shares by clients in violation of laws and
regulations.
5. Disclosure of information on characteristics of new share trading shall be
strengthened. Securities exchanges and other relevant institutions shall regularly
collect statistics on and publish price changes in new share trading and losses and
gains of various types of investors from trading new shares.
VI. Strictly enforcing laws, regulations and relevant policies to strengthen regulation
and punishment
The effective operation of the issue system of new shares requires a legal guarantee.
The CSRC will strengthen regulation and punishment of violations of laws and
regulations and misconduct to maintain the normal market order and protect the
lawful rights and interests of investors.
1. Efforts to crack down on false financial disclosure shall be strengthened. For
violations in the process of new share issues, including financial frauds, profit
manipulation and false disclosures, the relevant self-regulatory organizations shall
take self-regulatory measures in accordance with their self-regulatory rules, while the
CSRC shall, in light of the severity of circumstances, take measures such as
regulatory measures, official investigations and administrative punishment against the
legal representative, financial chief and other relevant personnel of a company and the
relevant personnel of an intermediary in accordance with law. Those suspected of any
crime shall be transferred to the judicial authorities for criminal investigation. Where
there are any express provisions of law or regulation, a heavier punishment shall be
imposed in accordance with law. Where there are no clear provisions of law or
regulation, further improvement shall be made. The CSRC will strengthen
cooperation with judicial authorities and self-regulatory organizations in regulation
and law enforcement so as to form a joint force.
2. Regulation and punishment regarding road shows and “price offering through
pulling strings” shall be strengthened. Regulation of the road show, price inquiry,
price offering and pricing processes of issuers, underwriters and inquiry participants
shall be strengthened, and necessary regulatory measures shall be taken against
exaggerations in publicity, false advertising, “price offering through pulling strings”
and other acts. The CSRC shall improve integrity files, strengthen development of the
legal system on integrity, and establish disciplinary mechanisms for violations of
integrity requirements.
3. For an issuer with the issue price higher than the average price-to-earning ratio of
listed companies in the same sector by 25 percent or more, if its actual profits after
listing are below its earning forecast, except for a force majeure, the CSRC will, in
light of the severity of circumstances, take measures against directors and senior
executives of the issuer such as placement under major attention, regulatory
interviews and determination as ineligible candidates, which will be recorded into
their integrity files; take regulatory measures against the legal representatives, project
leaders and other personnel of underwriters, such as regulatory interviews, placement
under major attention issuance of a letter of caution and determination as ineligible
candidates, which will be recorded into their integrity files; and take regulatory
measures against the relevant accounting firm, such as regulatory interviews and
issuance of a letter of caution, which will be recorded into its integrity file.
4. Regulation of third-party independent assessment and analysis institutions shall be
strengthened. Where any third-party independent assessment and analysis institutions
issue risk assessment and analysis reports on new shares in violation of the
assessment and analysis procedures or in violation of relevant laws and regulations or
issue assessment and analysis reports with any false records or deliberate omissions,
the Securities Association of China shall punish them in accordance with its
self-regulatory rules, and the CSRC shall deal with them in light of the circumstances.
5. Regulation of securities companies' compliance with the investor eligibility
management requirements shall be strengthened. The CSRC and its local offices shall
strengthen supervisory inspection on securities companies' investor eligibility
management, investor education and other activities and, if any violations of laws and
regulations are discovered, shall take regulatory measures in accordance with law,
such as an order of correction, regulatory interviews, issuance of a letter of caution,
and an order of disciplinary actions against relevant personnel.
6. Securities exchanges shall develop more detailed criteria for determining abnormal
trading, strengthen regulation of violations suspected of manipulation of new share
prices, and severely suppressing manipulation of new share prices.
The drawbacks in the current issue system of new shares are deep-rooted in the capital
markets in China. The too high prices of new shares, grave speculation in subscription
to new shares, and subsequent abrupt deterioration of performance or declining
market performance are caused by longstanding social, cultural and historical factors,
in addition to systems and mechanisms. Therefore, while the issue system of new
shares is further reformed, publicity, risk disclosure and investment education must be
strengthened to gradually change the various bad habits and unhealthy mentalities
existing in the issue process of new shares, such as participating in price offering with
the mentality of “giving gifts to extend congratulations,” participating in share
subscription with the mentality of sharing “fruits of victory,” and participating in
speculation with the mentality of “gambling and wining a lottery.” Desired effects
may be achieved only through comprehensive control after comprehensive impact
factors are taken into consideration.
The aforesaid guiding opinions on reforming the issue system of new shares have
been formed after extensive discussions and solicitation of opinions and careful
research. The CSRC will, on the basis of overall planning and unified coordination,
highlight priorities and implement them in steps to realize steady and orderly
advancement. In this process, necessary adjustment measures will also be taken in a
timely manner according to the actual circumstances of markets.