China outlines rules for IPOs

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China has announced tougher requirements for companies planning initial public offerings which analysts said would make it more difficult for unprofitable or shell businesses to float on the domestic market.

The rules, posted by the China Securities Regulatory Commission in state media on Monday, bar companies that have recently undergone major management or structural changes from listing and limit the scale of individual issues to twice the value of the companys net assets.

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They also ban listings of companies that rely on their largest shareholder for more than 0 per cent of sales and of companies whose purchases from the major shareholder account for more than 0 per cent of expenditure.

Chinese stock markets, among Asias worst performers this year but still widely considered to be overvalued, have slumped in recent months as investor enthusiasm fails to keep pace with a recent string of IPOs.

However, the announcement of the new rules did not appear to assuage the fears of an IPO glut, with the benchmark Shanghai composite index closing down 0.71 per cent on Monday to 1,81 points - an eight-month low.

The effectiveness of the new rules in improving the quality of new issues also depends largely on how strictly they are enforced - no easy matter given the political clout of many of the state-owned enterprises that await listing.

Dong Chen, a market analyst at China Securities Research in Beijing, said many past IPOs had been carried out by companies just reorganised in order to appear to meet profit requirements or companies almost wholly dependent on a parent for their core business.

Its a very common phenomenon, Mr Dong said.

The regulatory commission said companies must have been established for three years, and have no major management or business transformations in that period, before applying for a listing, although it also said some exceptions would be possible.

While Mr Dong gave the new rules a cautious welcome, he said that regulators also needed to find a way to help high-quality companies to list.

This is positive in itself, but only deals with one side of the problem, he said.

The regulator said the new rules would take effect on October 1, but that IPO applications already approved would not be affected.

Officials have been keen to support share prices, even though many companies with overseas listings trade at much higher multiples on domestic exchanges.

The CSRC this month ordered Yangtze Electric Power, which is building the massive Three Gorges dam and hydropower plant on the Yangtze river, to defer a Rmb10bn ($1.bn) offering planned for this month, apparently out of concern of its impact on the market.

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