(Yicai Global) Jan. 31 -- China has unveiled draft rules for a Nasdaq-style science and technology innovation board at the Shanghai Stock Exchange that among other measures would scrap limits on the pricing of initial public offerings. The bourse and the securities watchdog are now soliciting public opinion.
The China Securities Regulatory Commission has set up the board in Shanghai and is experimenting with a registration-based system for IPOs, the watchdog said on its website yesterday. The SSE published the draft regulations on the same day.
The rules allow companies with unrecovered losses or ones that are unprofitable to go public. No official limits are imposed on IPO pricing, though the unspoken red line of a firm's price-to-earnings ratio is 23 times when listing. The rules also raise the upper and lower daily price limits on stock trading to 20 percent and completely remove them in the five trading days after a firm debuts.
It's a great innovation that daily limits are lifted in the first five days, Dong Dengxin, head of the Finance and Securities Institute at Wuhan University of Science & Technology, told Yicai Global. The expectation had been for just a one-day reprieve, he added.
President Xi Jinping said in November that the SSE would set up a board for small and medium-sized innovative companies, along with the country's first pilot of a registration-based scheme. The move is aimed at making it easier for new economy companies to list. The central reform commission ratified the board's foundation at a meeting on Jan. 23.
Even though Shanghai's new board will have a more relaxed listing rule on corporate profitability, it will not compromise on those for standard operations, corporate management, information disclosure and other issues, according to the city's branch of the CSRC.
The CSRC has no explicit limit on the P/E ratio for IPOs but notes that firms should refer to the static average P/E for their respective fields released by the China Securities Index in the month before their debut. P/E is the ratio of a firm's stock price to its earnings per share and is one of the gauges most used to judge whether a stock price is reasonable. In practice, an IPO firm's P/E ratio has never exceeded 23 times in China.
The regulators will also allow qualifying firms with special equity structures and red-chip firms, meaning Chinese-funded companies listed in Hong Kong, to list on the sci-tech board.
Under the registration system, the CSRC would delegate the corporate review power to the SSE which would submit its results and the registration application to the CSRC. The CSRC would then determine whether to approve the registration within 20 trading days.
Based on the draft rules, an investor who seeks to participate in the board must have two years' experience and at least CNY500,000 (USD74,444) in their securities and fund accounts for 20 trading days before taking the plunge. An investor with less than CNY500,000 can enter the board via public funds. Brokerages are developing products targeting this group.
The CNY500,000 threshold is quite low and cannot go lower, said Wuhan University of Science & Technology's Dong.
A single transaction on the board must involve a minimum of 200 shares, while the threshold is 100 for firms listed on the SSE and the Shenzhen Stock Exchange.
Editor: Ben Armour