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IPOs need bold reforms

(China Daily)
Updated: 2009-05-25 07:45

The China Securities Regulatory Commission is right to restart fund raising in the domestic stock market even if investors do not welcome it so much at the moment.

The benchmark Shanghai Composite Index has rebounded by about 1,000 points since last October to cross 2,600 last week. This must have convinced many investors of the benefits of the de facto suspension of initial public offerings (IPOs) on the Shanghai and Shenzhen stock exchanges since last September. But such suspension neither helps economic growth nor facilitates healthy development of the stock market.

Given rising investor fears that IPOs might foil the current rally, it is a brave decision on the part of policymakers to decide to resume share sales that can allocate resources efficiently and help companies cope with the economic crisis.

Credit should be given to the securities regulator for putting long-term goals above immediate market concerns.

However, they should also ensure that the need to make IPOs impact the market more fairly and efficiently is as important as the market's function of raising funds.

The draft guidelines on reforming the process for new issues - which the securities regulator publicised last Friday to solicit comments from the public - has touched on many of the problems concerning IPOs. By suggesting that the quotation system for new issues should be revised to improve the price discovery function of the stock market and help retail investors subscribe to new issues, the regulator has to come to grips with the prevalent shortcomings in the IPO rules.

On the one hand, the jaw-dropping rise of many stocks' prices on the first trading day had fueled investor craze for new issues, making the market more of a casino than an investment arena.

On the other hand, the privilege that institutional investors enjoyed in both on-line and off-line subscription systems had given rise to doubts about the promise to protect the interest of individual investors, who, in this case, can only use the off-line system.

Under the new rules, issue prices will be fixed so as to faithfully reflect market demand, and institutional investors will be forced to use either the on-line or off-line subscription system to purchase new stocks.

Clearly, these stipulations will help check speculation and create a level playing field for both institutional and retail investors.

These are good, but not adequate to prevent institutional investors from overwhelming retail investors with their deep pockets for subscription of new issues.

The proposal that each online account will be limited to applying for not more than one-thousandth of a new issue can be easily circumvented by institutional investors with multiple accounts. The loopholes in these and other provisions should be plugged at the earliest.

(China Daily 05/25/2009 page4)