The spokesman of the China Securities Regulatory (CSRC) accepted an interview on relevant issues of the “Guidance Opinions on Further Reforming and Improving New Share Issuance System” (hereinafter referred to as “Guidance Opinions”) issued by the CSRC on June 10.

Reporter (R): Could you introduce the solicitation of public opinions regarding the “Guidance Opinions (Draft for Comment)”?

A: The CSRC started to solicit public opinions on the “Guidance Opinions” on May 22. As of June 5, the CSRC had received 1,687 feedback opinions by way of email and fax.

During the period, the CSRC also held seminars and invited representatives from various sides to discuss the “Guidance Opinions”. On May 25, we invited the executives from some securities companies, fund management companies and insurance assets management companies as well as the experts and scholars to exchange views on the methodology and specific measures for the reform of the new share issuance system. On June 3, relevant departments of the CSRC convened another seminar to hear the opinions of some sponsors. On the same day, the individual investors’ seminars were held in Shanghai and Shenzhen to hear their opinions and suggestions on the “Guidance Opinions”.

Market participants are generally in favor of reforming the new share issuance system. The market-oriented reform measures has learned from the experience of the overseas mature capital markets while taking into consideration the special situation of China’s capital market at this stage, and responded to the hot issues on new share issuance that attracted the market attention at present. Besides, the arrangement of implementing the reform by steps and deepening it at proper time has prudently considered the complicatedness of the growing market and nailed down the direction of further promoting the reform while conducting the current work. Market participants participating in the opinion solicitation also put forward some constructive opinions on the “Guidance Opinions”.

R: Which aspects that market participants’ opinions and suggestions regarding “Guidance Opinions (Draft for Comment)” center on? What are the changes to the “Guidance Opinions” officially issued this time compared with the Draft for Comment?

A: From the feedback opinions we found that the market participants’ opinions center on the following four aspects.

Firstly, it is believed that at present, most investors have only one account respectively, while some investors have more than one account respectively. According to the regulation of China Securities Depository and Clearing Corporation Limited, a securities company can open a proprietary account with each RMB5 million registered capital, and the securities investment fund can open an account for each rented special seat for fund trading, which leads to more than one account for each person (institution). In accordance with the principle of fairness, it should be nailed down that one investor can only use one account to subscribe for new shares, so that shares distribution will effectively favor the small and medium investors with subscription intents.

Secondly, it is believed that the large number of shares locked up at present is to the disadvantage of restraining the market speculation. The shares lock-up should be eased to increase the amount of tradable shares.

Thirdly, it is believed that the issuance mechanism should be more flexible following the enhanced market-oriented pricing, and more independent options should be granted to securities dealers in such areas as clawback and issuance suspension.

Fourthly, it is believed that the upper limit (one thousandth) of online subscription proportion is low and the amount of shares distributed to each account online is too small. It is suggested by corporate institutions that the upper limit of online subscription proportion for one single account should be increased to one-hundredth; if not, the offline issuance proportion should be increased. While some individual investors hold that the upper limit (one thousandth) is high and is not that favorable for small and medium investors, and suggest that it should be adjusted to one ten-thousandth or lower; if not, the online issuance proportion should be raised.

Upon careful research, we accepted the first three suggestions, based on which we modified and improved the “Guidance Opinions (Draft for Comment)” accordingly: firstly, regarding the account issue, the CSRC conducted the special clear-up of accounts in 2007 with remarkable results achieved, and raised clear requirements on the account usage and management of various parties. To clear up the doubts, we further clarify the requirement that “one single investor can only use one eligible account for new share subscription” in the recent reform measures. Secondly, the content of “adjusting the share issuance policy at proper time and increase the amount of tradable shares” is added in the basic reform contents. Thirdly, the principle of “improving the mechanisms of clawback and issuance suspension” is added in the basic reform contents.

As for the fourth suggestion, after taking all factors into consideration, we keep the upper limit (one-thousandth) of online subscription proportion for one single account unchanged, and will not adjust the existing stipulations on online and offline issuance proportions temporarily.

In addition, as for some individual investors’ suggestions of shares allotment based on the market capitalization, one lot per person and offering of stock shares, we have fully demonstrated them in the process of forming the scheme and explained the difficulties of implementation in soliciting the opinions. We will not accept these suggestions temporarily as it is hard to judge the implementation conditions are met.

R: Does the content of “adjusting the shares issuance policy at proper time and increase the amount of tradable shares” mean the termination of the lock-up limit towards major shareholders’ shares?

A: In the process of soliciting opinions, both the institutional investors and the individual investors raised suggestions on increasing the amount of tradable shares. For example, some individual investors suggested canceling the lock-up of major shareholders’ shares, and all the shares should be tradable in a company’s listing. Some institutional investors suggested cancelling the mandatory requirement of 3-month lock-up period for offline allotted shares. And it is also suggested that the offering of stock shares should be launched immediately.

After the equity division reform, all the shares of a company upon implementation of the reform are floating shares. The sales limit of some shares is not contradictory with the floating nature of a company’s shares. The overseas mature capital markets often impose a sales limit period of 6 to 12 months on controlling shareholders and strategic investors, and China’s laws, regulations and relevant rules also put forward clear requirements on lock-up of the major shareholders’ shares. The sales limit and lock-up of major shareholders’ shares both at home and abroad aim at maintaining the stability of corporate governance structure as well as operation and management within certain period and preventing the frequent change of newly-listed companies’ management due to the too-fast change of major shareholders, which may lead to the uncertainty in operation and management, affect the sustainability of companies’ businesses and result in risks. From this view point, the lock-up period requirement for the shares of major shareholders will exist for a long term as an internal restraint mechanism of the listed companies.

As for the offline allocation lock-up and offering of stock shares, the solicited opinions are very important and conforming to the market orientation. By abiding by the principle of implementing the issuance system reform by steps and improving it gradually, we will create conditions and promote it step by step.

R: Why must the offline allocation of certain proportion be arranged for the A shares issuance?

A: In the process of opinions solicitation, some people suggested that all shares should be issued online. It is not complicated to operate the suggestion, while the stocks pricing mechanism was not taken into consideration. How to price a stock is one of the difficulties in new share issuance. The pricing of new shares, a professional and technical task, needs to take into consideration multiple factors such as the issuer’s industry background, market status, business performance and financial condition. After the evolution of the overseas developed capital market for years, the prices are generally decided after negotiation by institutional investors with strong research and pricing competence as well as capital strength, issuers and underwriters. That is because institutional investors, especially professional investment institutions, will form stronger restraint towards the issuer’s quote to maintain a balance. To ensure the authenticity of the pricing, the price fixer must purchase certain amount of shares at the fixed price, and the offline allotment of certain proportion is the basis for the institutional investors to assume the pricing responsibility. If the pricing institutions do not purchase certain amount of shares, the authenticity of the pricing is very doubtful.

In terms of new shares’ pricing and subscription, the fundamental interests of offline major institutional investors as well as the small and medium investors are consistent. Firstly, as the buyer of stocks, the institutional investors as well as the small and medium investors are motivated to restrain the seller to get a reasonable price, reduce the risk and obtain the profit. Secondly, most of the offline institutions such as the fund companies and insurance companies with large amount of capital manage the wealth for investors, with most of the assets under management coming from small and medium investors as well as thousands of insured customers. So if such institutions gain profits from the allotment in IPO, the profits are actually the interests of small and medium investors. Bedsides, the allotment of a certain portion of stocks to offline institutional investors is conducive to the stability of new shares’ prices after their listing. In China’s secondary market, the turnover rate of institutions is remarkably lower than that of individuals.

It needs to be clarified that in order to further optimize the pricing mechanism, the offline allocation mechanism should be improved and the inquirees should be optimized as the reform is deepening.

R: How is the preparation for the new share issuance reform?

A: Based on further improvement of the inquiry system, the reform of the new share issuance mechanism, consisting of few contents but covering wide scope, needs to take a lot of factors into consideration. The smooth progression of the reform requires not only the careful organization and disposition of the regulatory authorities, but also the unified understanding and active cooperation of market participants. So far, we are actively implementing various reform requirements and steadily conduct all tasks.

The CSRC has thoroughly discussed with units including the Shanghai Stock Exchange, the Shenzhen Stock Exchange, the depository and clearing companies and the securities associations regarding the adjustment of such technical systems as the offline electronic subscription platform and the depository and clearing platform as well as the formulation of relevant operational rules. All relevant units are pressing on with the technical preparations such as the system adjustment and the rule formulation. We have also organized the underwriters’ meeting recently to discuss the “Guidance Opinions” to promote the underwriters to correctly understand various reform requirements, fulfill their responsibilities in an all-around way and provide professional services. Generally speaking, various tasks are in orderly and smooth progress.

R: What are the expectations for the market effect of the issuance system reform?

A: The general goal of the reform is to optimize the price discovery function by improving the market-oriented pricing mechanism; to push the buyer (investors) to strengthen the restraint over the seller (issuers) and continuously enhance the restraint power of the buyer; to value the participation intents of small and medium investors and properly lift the lot-winning proportion.

We think that these goals, not difficult and attainable, will promote the stock market in a positive way in the long-run. But in recent period, the issuance of the first stock or a few stocks after the adoption of the new system may not bring about satisfactory results to various parties but lead to inconsistent opinions. For example, the unsound market restraint system and the weak restraining power of the buyers may result in the excessively high issuance price, so the price on the first day of listing might be lower than the issuance price. Another possibility is the spread between the primary market and the secondary market is still relatively high on the first day of listing due to the over speculation on the secondary market. All this may raise doubts about the effect of the reform and bring risks to the issuers, investors and underwriters, which should be paid attention to and dealt with by various participants. It is understandable to have relatively great differences at the beginning of the reform, which will be gradually stabilized after a period of time, and the participants should be confident about it.

The reform and the fostering of the mechanism is a gradual process, which can not be done at one time. It requires earnest and prudent participation of various market participants. By fulfilling the responsibilities and protecting their interests, market participants should implement various arrangements for greater improvement in the market-oriented process of the new share issuance system.