Editor’s note: Ye Lin is a law professor and director of the Legal Research Center of Business Environment at Renmin University of China. The article reflects the opinion of the author 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 offering (IPO) system to a registration-based IPO system is a significant transformation in China’s capital market, comparable to the reform of the second equity division. In 2018, the Shanghai Stock Exchange established the Science and Technology Innovation Board and experimented with the registration-based system. Subsequently, in 2019, the Standing Committee of the National People’s Congress revised the Securities Law and began full implementation of the registration-based IPO system. This marks a transition from the approval-based system to the registration-based IPO system.
Under the previous approval-based IPO system, an issuer was required to file IPO applications with the China Securities Regulatory Commission (CSRC), and the CSRC then assessed the issuer’s IPO qualifications and conditions. After approving the issuer’s IPO, the CSRC would determine the approximate timing of the IPO and use methods such as windowing to influence the issue price. Typically, issuers could only set the issue price at a price-to-earnings ratio of 23. Therefore, in the approval-based system, the CSRC determines the stock quality, issue timing and issue prices. This model shows strong administrative intervention in the IPO process.
In 2019, the Securities Law provided for the introduction of a registration-based IPO system. Subsequently, the CSRC issued dozens of related rules aimed at facilitating key phases of the implementation of the registration-based system. The core practice is to allow exchanges to consider IPO applications. After approval from the exchange, the issuer can register with the CSRC for the IPO. After registering with the CSRC, the issuer has the autonomy to set prices and issue shares publicly. It can be seen that the registration-based system is essentially market-oriented. On the one hand, stock exchanges replace the CSRC as IPO examiner, with the CSRC responsible for registering IPOs, thereby reducing excessive restrictions that the CSRC imposes on IPOs. On the other hand, after registration approval, issuers have the right to negotiate issuance prices and timing with intermediary institutions, and the CSRC no longer uses window policies.
The registration-based IPO system is a market-oriented issuance mechanism. It is based on a solid theoretical basis and a summary of national and international practical experience. This system emphasizes the central role of information disclosure, emphasizes the position of investors in taking investment risks, and reduces the state’s dominance in resource allocation. The registration-based IPO system increases the transparency of the rules in the issuing market, strengthens the financing function of the stock market, improves the financing efficiency of issuers, diversifies investors’ investment products, and enjoys wide approval among market participants. It is worth noting that China has only recently implemented the registration-based IPO system. Therefore, issuers, intermediary institutions and investors face challenges in adapting to the market-oriented mechanism and managing equity investment risks. Furthermore, the CSRC and the exchanges face realistic challenges in refining the registration-based IPO system and advancing its implementation.
The registration-based IPO system has opened the door to market-based financing and brought with it a number of supportive reforms.
First, it is imperative to strengthen the gatekeeping responsibilities of exchanges and intermediary institutions to curb or eliminate various financial frauds and strengthen the legal responsibilities of intermediary institutions.
Second, it is important to streamline the entire process for the full implementation of the registration-based IPO system and coordinate the relationships between financing, investment, trading and delisting in order to increase the effectiveness of the implementation of the registration-based IPO system.
Third, efforts must be made to expand the toolkit of investor protection systems by continuing to leverage the role of front-end protection mechanisms such as information disclosure and emphasizing the ex post protection role of decision-making bodies such as courts and arbitration authorities.
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