Adhere to market-oriented reform of registration-based IPO
Editor's Note: Ye Lin is a law professor and director of the Legal Research Center of Business Environment at the Renmin University of China. The article reflects the author's opinion, and not necessarily the views of CGTN. It has been translated from Chinese and edited for brevity and clarity.
The transition from an approval-based initial public offerings (IPO) system to a registration-based IPO system is a significant transformation in China's capital market, comparable to the second equity division reform. In 2018, the Shanghai Stock Exchange established the Science and Technology Innovation Board and experimented with the registration-based system. Subsequently, the Standing Committee of the National People's Congress revised the Securities Law in 2019, and the full implementation of the registration-based IPO system started. This marks a shift from the approval-based system to the registration-based IPO system.
Under the previous approval-based IPO system, an issuer was obligated to submit IPO applications to the China Securities Regulatory Commission (CSRC), and the CSRC would then assess the issuer's IPO qualifications and conditions. After approving the issuer's IPO, the CSRC would specify the approximate timing of the IPO and use methods like window guidance to influence the issuance price. Typically, issuers could only set the issuance price at a price-to-earnings ratio of 23. Therefore, in the approval-based system, the CSRC determines the stock quality, the issuance timing, and issuance prices. This model reveals a strong administrative intervention in the IPO process.
In 2019, the Securities Law stipulated that a registration-based IPO system should be adopted. The CSRC subsequently issued dozens of related rules, aiming to facilitate key stages for implementing the registration-based system. The core practice is to empower stock exchanges to review IPO applications. After approval by the exchange, the issuer can register with the CSRC for the IPO. Once registered with the CSRC, the issuer has the autonomy to set prices and publicly issue stocks. It can be seen that the essence of the registration-based system is market-oriented. On the one hand, stock exchanges replace the CSRC as the IPO reviewer, with the CSRC being responsible for the registration of IPOs, reducing excessive constraints imposed by the CSRC on IPOs.On the other hand, after the registration approval, issuers have the right to negotiate issuance prices and timing with intermediary institutions, and the CSRC no longer employs window guidance.
The registration-based IPO system is an issuance mechanism centered around the market. It is rooted in a solid theoretical foundation and a summary of domestic and international practical experiences. This system highlights the pivotal role of information disclosure, underscores the position of investors in assuming investment risks, and diminishes the government's dominance in resource allocation. The registration-based IPO system enhances the transparency of the rules in the issuance market, strengthens the financing function of the stock market, improves issuers' financing efficiency, diversifies investors' investment products, and enjoys widespread approval among market participants. It is worth noting that China has implemented the registration-based IPO system only for a brief period. Therefore, issuers, intermediary institutions, and investors have encountered challenges in adapting to the market-oriented mechanism and dealing with stock investment risks. Furthermore, the CSRC and stock exchanges face realistic problems in refining the registration-based IPO system and advancing its implementation.
The registration-based IPO system has opened the door to market-oriented financing, entailing a series of supporting reforms.
Firstly, it is imperative to strengthen the gatekeeping responsibilities of stock exchanges and intermediary institutions to mitigate or eliminate various financial frauds and reinforce intermediary institutions' legal responsibilities.
Secondly, it is essential to streamline the entire process for the full implementation of the registration-based IPO and coordinate relationships between financing, investment, trade, and delisting to enhance the effectiveness of the implementation of the registration-based IPO system.
Thirdly, efforts must be made to enrich the toolbox of investor protection systems, continuing to leverage the role of front-end protection mechanisms such as information disclosure, and emphasize the post-event protective role of adjudicatory bodies like courts and arbitration agencies.