Accurate IPO Information Essential

The China Securities Regulatory Commission is soliciting public opinions on IPO reform. Nobody doubts the resolve of the watchdog agency under the stewardship of its proactive Chairman, Xiao Gang, to address an issue that has for so long frustrated and confounded investors and tarred the image of stock market players, including investment banks and stock brokerages.

Because of investors' mistrust, IPOs are widely seen as a means for greedy company owners to rob the market of funds for private gains rather than the benefit of shareholders. For that reason, investors have been calling for an indefinite extension of the unofficial moratorium on IPOs, which has lasted for nearly a year. They fear that ending the moratorium and allowing IPOs will further drain liquidity from the moribund market which, despite the latest spurts of energy, has remained one of the worst performers in the world.

In the past several months, there have been occasional rumors about the reopening of the IPO floodgates, and every time such a rumor emerges share prices tumble as investors dive for cover, as the fear of IPOs has taken such a strong hold on them.

This IPO phobia must be exorcised because it has neutralized a key function of the capital market. That function is to provide a channel for the public to make equity investment in enterprises so that ordinary investors can also benefit more directly from economic growth. Those willing to invest used to accept the invitation with great enthusiasm. Many new share issues in the past were heavily oversubscribed.

But more and more investors have become disillusioned because they have failed to reap the benefits, as many newly listed companies have not produced the results as promised in their prospectuses. As a result, the share prices of these companies have fallen below the offer prices in their IPOs.

The problem, of course, does not lie in the market mechanism but rather in the poor quality of the IPO candidates, many of whom after their listing are found to have doctored their books and fabricated misleading information to project rosy earning prospects. They are able to get away with such trickery by exploiting the loopholes in the existing supervisory system.

It was a sound decision to slap a moratorium on IPOs until the loopholes are plugged, which requires extensive reform from the ground up and which will definitely infringe on the many vested interests that have dominated the market for so long.

Some economists hold the view that the core approach that gives the authority the power of approval needs to be reexamined. They contend that such a process misleads investors into thinking that the authority's seal of approval is a guarantee of the quality of the companies seeking a public listing through IPOs. But that has obviously not been the case.

It is too much to ask the IPO vetting committee of the CSRC, with its limited power of investigation and other constraints, to ensure the quality of every company applying for a stock listing. Hong Kong made the switch to the voluntary disclosure system, holding the company executives and sponsors responsible for the disclosure of accurate information in an IPO. Withholding key information or the dissemination of false information to mislead investors should result in heavy fines and prison terms.

To adopt such an approach, which is common among many other major capital markets, there is obviously a need to tighten the disclosure requirements, stiffen the penalties under the securities ordinance and expand the CSRC's powers of investigation and prosecution.

Is the CSRC ready for that?