Chinese authorities said that sponsors of initial public offerings on its forthcoming technology-focused listing venue will need to invest in as much as 5 percent of the shares issued by their clients, an unusual requirement that may limit foreign interest in leading deals on the new bourse.
Sponsors and their units should hold their stakes for at least 24 months, the Shanghai Stock Exchange said in a statement late Tuesday, an arrangement virtually unheard of in global markets.
The rules may be an attempt to ensure investors are protected on the so-called tech board, which will have a lighter regulatory regime than the rest of China’s equity markets, according to Roy Smith, emeritus professor of finance at New York University.
“The idea is to make sponsors/underwriters more conservative in promoting IPOs that seem hot, with ‘skin in the game,”’ he said by email. “Chinese sponsors may be willing to take on this risk for various local reasons. Foreign banks, maybe not.”
Regulators have been working to implement the Science and Technology Innovation Board, which was first announced by President Xi Jinping last year and is expected to help China stem an exodus of new economy IPOs. Policy makers are also trying to increase participation of the markets in funding their economy after decades of relying on state-run banks.
While the ownership rules run counter to international practices, they may not have much of an impact in the domestic market. Of the 79 applicants for the tech board, none have an international firm acting as sponsor, though one deal is sponsored by Citi Orient Securities Co., a joint venture that Citigroup Inc. will shortly depart from.
The tech board is seen as a key part of China’s financial reforms this year, providing an avenue for many of the nation’s startups to go public and also introducing rules that are less onerous for participants than the rest of the equity market. As well as a streamlined IPO process that does away with strict reviews by the nation’s financial regulator, the venue will scrap limits on pricing and trading debut gains, and allow unprofitable companies to go public.
While taking a lighter approach, however, authorities remain conscious of finding ways to protect China’s army of retail investors, who by some estimates make up about 80 percent of the stock market. Forcing banks to hold stakes in companies they take public is a “market-based solution,” said Paul Schulte, Hong Kong-based founder of Schulte Research.
“It’s pretty damning they have to do this since investment banks stopped thinking they had any fiduciary duty to support IPOs,” Schulte said.
For IPOs that raise less than 1 billion yuan ($150 million), sponsors must buy 5 percent of the stock being sold up to a limit of 40 million yuan, according to the rules. The required shareholding drops as the deal value rises, and the figure for any offering that raises more than 5 billion yuan will be 2 percent or no more than 1 billion yuan.
Forcing greater accountability on IPO sponsors has been a focus of regulators in neighboring Hong Kong, where rules make banks and brokerages liable for what’s said in a company’s prospectus. Firms are also required to ensure stated accounts are accurate. The city stops short of telling bankers to buy into their deals, however.
“Sponsors are being forced to pay to play,” said Mark Williams, master lecturer at Boston University’s business school.