China moved closer to end a 13-month long moratorium on initial public offerings, releasing guidelines on recently proposed fundamental reforms of the way companies raise funds in the country's stock market.
At the same time, China unveiled guidelines on the issuance of preferred stocks, which offers listed firms a fresh channel for funding to shore up capital base, especially listed banks.
Two weeks ago, China's top leaders promised, in a blueprint for economic and social policies over the next decade, that it will push for reforms of a registration-based stock issuance system while promoting fundraising activities in the equity market through a variety of channels.
Both the moves are aimed to refine and improve the financing structure of China's capital markets, said Sinolink Securities analyst Huang Cendong.
The long-awaited launch of the IPO reform plan indicates an imminent restart of the country's IPO market, where more than 760 firms are queuing for a listing.
China shut the door to IPOs in the country in November 2012, just before a once-in-a-decade leadership transition, a move aimed at boosting the long-suffering stock market, analysts said. The reform plan marks a step toward a shift to registered-based IPO system, a system widely used in developed markets where the regulator focuses on whether a firm seeking a listing meets the requirement for information disclosure.
Currently, China adopted an approval-based IPO system where the regulator focuses on whether an issuer can sustain its operation and whether it will be able to stay profitable, which leads to a complicated and opaque examination process that can take multiple rounds of reviews and several years before listing.
"We believe the reform laid out the groundwork for an introduction of registered-based IPO system," the China Securities Regulatory Commission said in a transcript of answers to questions from reporters on the reform plan.
The shift is a significant easing of government control over China's IPO market, which channeled 488 billion yuan ($80 billion) to issuers in 2010, the world's largest IPO market that year.
The approval-based IPO system has long been criticized for distorting supply and demand and artificially inflating valuations of new listings in one of the world's largest stock markets.
Under the guidelines on further reform of the IPO system, the China Securities Regulatory Commission said it will focus on the review of compliance of IPO plans, while it will let investors and the market judge the value and risks of IPOs. Once a company gets the go-ahead to seek an IPO, the commission said it will allow the market to decide the timing of it and how it works. Following the release of the guidelines, firms seeking IPOs will need around one month to prepare, the commission estimated. Around 50 firms are expected to have IPO preparation done, allowing them to list by January 2014, the commission added.
The review of stock offerings focuses on the information disclosure of the issuer, according to the guidelines which govern the IPO application; the pricing of stocks; the share placement; responsibilities of market participants; and measures to crack down on fraudulent listing.
"The market-oriented reform will make the issuer and intermediaries to shoulder more responsibility while strengthen the protection for smaller investors," said Wang Jianyong, a partner with Haiwen & Partners, a law office that advises companies seeking a listing in China.
Issuers, underwriters and other intermediaries should commit to compensate investors that suffer from losses incurred by falsehoods, misleading statements or major omissions in IPO documents, according to the guidelines.
According to the guidelines, controlling stakeholders, as well as board members and senior executives who own shares, should commit that they won't unload shares below the IPO prices for two years after the lock-up period ends. If the shares of a firm close below IPO prices six months after listing, these shareholders must promise to extend the lockup period by at least another six months, according to the guidelines.
"The sentiment in the stock market will likely be hurt with the upcoming IPO restart," Mr. Wang said.
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