China revamps IPO rules, gets tough on disclosure, as it amends securities law for first time since 2004

Zhang Shidong

China’s legislature has paved the way for a more market-based initial public offering regime by approving amendments to the country’s securities law after four years of deliberations. The amended law, effective from March 1, also takes a tougher stance on false disclosures by listed companies.

The National People’s Congress, the country’s highest legislative body, endorsed the changes over the weekend, according to a statement by top watchdog China Securities Regulatory Commission. Deliberations on the amendment started in 2015. China’s securities law was first implemented in 1999 and was last amended in 2004.

The changes will bring China’s US$7.2 trillion stock market, the world’s second-largest, more in line with international practices, particularly at a time when overseas investors are increasing their holdings of yuan-denominated assets in response to index compilers raising the weighting of Chinese stocks in their gauges. Investors cheered the move, lifting the benchmark Shanghai Composite Index to a five-month high with a gain of 1.2 per cent on Monday.

The major changes include the implementation of a registration system for IPOs, heavier punishments for breach of rules for information disclosure, and stricter requirements for what publicly traded companies should disclose to investors.

The amendment also removes from the law a clause requiring sustainable profitability at companies seeking to list. It makes information disclosure central under the new registration system. The initial success of the Science and Technology Innovation Board, or Star Market, under the Shanghai Stock Exchange, has set the stage for this system – new offerings on Star Market are vetted in a more market-based way.

New Clauses significantly increase penalties for fraudulent listings and false disclosures. Fines will now amount to as much as the entire proceeds from IPOs, as against 5 per cent currently. Penalties linked to breach of disclosure rules could amount to 10 million yuan (US$1.43 million) at most, rising from a current fine of 600,000 yuan at the most.

Brokerages rallied on Monday on expectations they will benefit most from the reform, emerging as the day’s best-performing industry group. A gauge of mainland China-listed brokerages rose 5.6 per cent, with Founders Securities and Citic Securities, the country’s biggest brokerages, surging by the 10 per cent daily limit.

This article China revamps IPO rules, gets tough on disclosure, as it amends securities law for first time since 2004 first appeared on South China Morning Post

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