On November 30, the CSRC released the Opinions of the CSRC on Further Promoting the IPO System Reform (hereinafter referred to as the “Opinions”). CSRC spokesperson answered questions from reporters regarding matters of the reform.

Q1: The 3rd Plenum of the 18th CPC Congress has called for the reform towards a registration-based stock issuance system. What is the significance of these Opinions to advancing the reform of registration-based system?

A: Reform towards a registration-based stock issuance system has wide-ranging implications and should be carried out in a step-by-step manner. Some countries and regions have adopted different practices for the implementation of registration-based system but share the following common features: information disclosure by issuers is central to IPO, intermediary agencies are responsible for the truthfulness, accuracy and integrity of information disclosure by issuers, regulatory authorities conduct compliance review for the application documents from issuers and intermediary agencies without making an judgment on the profitability of the IPO companies, and investors, based on sufficient information disclosed to them and at their own discretion, determine the value and risks of the IPO companies and make independent investment decisions.

It needs to be noted that the registration-based system is not simply an effectiveness-upon-registration system. It cannot be understood as a hands-off regulatory approach whereby registration and filing will automatically lead to effectiveness nor does it exempt the review of stock offering or justify the offering of junk stocks. The intention is to reform the method of review and verification.

Reform towards a registration-based system requires the revision of law, the drafting of a series of supporting reform measures and adaptation and transition of the market. It is a continuous, gradual and deepening process. We believe that this round of reform will establish a favorable foundation for the reform towards a registration-based system

Q2: The IPO system reform has always been a focus of public attention. Would you please give us an update on the CSRC’s collection and adoption of public comments since June 7th?

A: The CSRC sought public comments regarding the Opinions (Consultation Draft) on June 7th. So far, we have received 3,229 official feedback comments, including 3,168 emails, 38 faxes and 23 written documents. Of which, 91 comments are from institutions and 3,138 comments are from individual investors. In addition, over 130 experts and industry insiders expressed their opinions on this reform through newspapers, blogs and microblogs. Generally speaking, market stakeholders maintain a positive attitude towards this reform. Market stakeholders have proposed many comments and suggestions regarding the consultation draft and we have revised and improved the Opinions based on careful evaluation of these comments and suggestions.

Q3: What targeted measures have been introduced in this reform regarding investor protection?

A: The purpose of this round of reform is to protect the lawful rights and interests of investors and especially small and medium-sized investors. The Opinions have elaborated measures from five aspects to enhance investor protection: first, to urge issuers to use plain language and provide truthful, accurate and complete company information, enhance risk disclosure and enable investors to make informed investment decisions; second, to promote fair and reasonable pricing, restrict high pricing by issuers, prevent investors from quoting high prices, and curb speculation of new stocks. For instance, sell-off has been pegged with stock offering price and issuers are required to develop a share price stabilizing plan and remove 10% of subscriptions with the highest price quotations when determining the offering price; third, to respect the subscription intent of small and medium-sized investors in the allocation of new shares and adjust the claw-back mechanism and the online placement mechanism, so that in the event of proactive subscriptions by small and medium-sized investors, the quantity of online share offering can reach as much as 80% of public share offering and online placement mechanism will be more favorable to the subscription by small and medium-sized investors; fourth, to enhance the compensation liabilities with respect to violations in information disclosure. Where violations in relation to information disclosure have caused losses to investors, issuers and their controlling shareholders, relevant intermediary agencies and other responsible parties must compensate for the losses of investors in accordance with the law. Where severe violations in connection with information disclosure have affected the assessment on the listing conditions of issuers, issuers will be required to repurchase the new shares that have been already issued and controlling shareholders will be required to repurchase restricted shares that have already been transferred, etc.; and fifth, to enhance regulatory enforcement, resolutely crack down on violations and establish legal safeguards for the protection of investors.

Q4: In which aspects will this reform improve market-based operating mechanism?

A: Improving market-based operating mechanism is a priority of this reform, as embodied in the following five aspects:

First, market-oriented review philosophy. After this reform, regulatory authorities and the Public Offering Review Committee of the CSRC will only review the lawfulness and compliance of public offering application documents and information disclosure content without making a judgment on continuous profitability and investment value of issuers, and such judgment will be at the discretion of investors and the market instead;

Second, market-oriented financing model. In the future, more restriction-free financing means are available for issuers to choose, including the issuance of common stock, corporate bond or both;

Third, market-oriented pace of public offering. The quantity and pace of IPOs will be decided by the market to a greater extent. Offering of new shares will increase when demand is vibrant and vice versa;

Fourth, market-oriented offering price and offering method. Specific processes of book-building, pricing and allocation will no longer be regulated and issuers and lead underwriters will independently determine the timing and plan of public offering and independently determine the IPO price based on the book-building results. Lead underwriters may allocate offline share offering according to prior released principles in order to balance the interests of buyers and sellers and set reasonable prices; and

Fifth, market-oriented restraint mechanism. Administrative control of prices will be replaced with market-oriented restraint on relevant responsible entities. Such market-oriented restraint includes, for instance, pre-disclosure of relevant information, enhanced public supervision and the requirement that relevant responsible entities undertake to peg their sell-off price with the offering price for a certain period of time.

It needs to be stressed that market-oriented reform does not mean a hands-off regulatory approach. Since the end of last year, the CSRC has carried out financial special inspection activities for enterprises under review and dealt with a number of violations, which achieved desirable results. In order to ensure that market entities fulfill their respective responsibilities, maintain market order and protect the lawful rights and interests of investors, regulatory authorities and self-regulatory organizations will earnestly implement reform measures and further enhance concurrent and ex poste supervision and increase the intensity of regulatory enforcement.

Q5: Which measures have been introduced in this round of reform regarding the quality of information disclosure by listed companies?

A: Truthful, accurate and complete information disclosure is the foundation to the reasonable pricing of new shares and the essential basis for the decision-making of investors. In order to effectively improve the quality of information disclosure, the following measures have been adopted in this round of reform: ex ante clarification of responsibilities and improvement of standards; concurrent enhancement of supervision and regulation; and ex poste intensification of punishment and establishment of regulatory authority.

First, the CSRC has clarified responsibilities and improved standards by implementing the information disclosure-based philosophy, clarifying the responsibilities of issuers and intermediary agencies, urging the fulfillment of responsibilities among respective stakeholders, improving information disclosure standards, highlighting disclosure priorities, requiring the use of plain and understandable language, and making information disclosure more targeted, practical and effective. In addition to this, the CSRC has spelled out more detailed, specific and timely requirements with respect to information disclosure for various stages of offering including price quotation, pricing, subscription and allocation for the reference of online investors upon subscription, and prevent tunneling by means of public supervision;

Second, the CSRC has enhanced supervision and regulation. Starting with sponsors, the CSRC requires disclosure of tutoring description; and has substantially advanced the pre-disclosure deadline of prospectus. Information disclosed by issuers should be subject to longer durations of public supervision in order to discover problems and deter violations. Drawing upon the experience of financial special inspections carried out in this year, regulatory authorities will conduct random inspections on the fulfillment of responsibilities by intermediary agencies for enterprises under review, subjecting those under random inspection to stricter and more detailed review. Leads of violations discovered in the process of review will be immediately transferred to the enforcement departments, which will enhance regulatory deterrence;

Third, the CSRC has increased the intensity of penalty and established its function as a regulatory deterrent. In the future, starting from the date of application, issuers and intermediary agencies should take corresponding legal liabilities for their information disclosure. In the process of review, once leads of violation are discovered, depending on the severity of violations, the CSRC will terminate review, transfer the case to audit and judicial departments and finally hold relevant persons accountable. It is clearly required in this reform that in the event of serious violations in relation to information disclosure that have caused losses to investors, relevant responsible entities shall compensate for the losses incurred by investors; where the assessment on offering and listing conditions is affected, issuers shall repurchase the new shares that have already been issued and controlling shareholders shall repurchase the restrictive shares that have already been transferred.

Q6: What measures have been adopted to address the problems of “three-highs” (i.e. high offering price, high P/E ratio and high oversubscription rate) and “money encirclement” in IPO?

A: After many rounds of IPO pricing reform, the original administrative pricing has given way to market-based pricing, which is an irreversible trend of reform. After this round of reform, the “25% rule” will no longer be in place, but it does not mean that restrictions on the high IPO price and “money encirclement” will be eased. The key to “three-high” problem is high offering price. There are many reasons behind this problem including new share speculation, supply and demand imbalance of new shares, impulse of issuers and sponsors to set high offering price, speculation on new shares and the factor of human relationship in price quotations.

After the application of market-based pricing practice , measures intended to address such problems as high IPO price and“money encirclement” will be taken in the following three aspects in this round of reform:

First, to balance supply and demand and curb high offering price. The reform will give greater play to market regulation function, so that the pace and quantity of IPOs will be determined more by the market and offering prices will reflect market supply and demand relationship in a more realistic manner. The transfer of existing shares will be facilitated to increase the supply of individual new shares on their first trading day. Quantity of transfer of existing shares by shareholders also reflects their assessment on corporate value. Significant sale of existing shares will discourage buyers from quoting high prices;

Second, to enhance restraint and promote reasonable pricing. First, sell-off will be pegged with offering prices so as to restrict issuers from setting high offering prices. For excessively high offering price, if share price drops below offering price within a certain period of time after IPO, responsible entities including controlling shareholders of issuers should automatically prolong the lock-up period.

In addition, measures will be taken to restrain high price quotations by institutional investors. In determining offering price, the 10% subscriptions with the highest offering price will be required to be excluded. The portion with the highest price quotations should not affect offering price, nor should the highest bidder receive allocations, which aims to prevent the factor of human relationship in price quotations or misguided high price quotations. In addition, the CSRC will increase the proportion of offline allocation, restrict the number of investors eligible for offline allocation and increase the quantity of shares to be allocated to individual offline investors, thereby increasing the risks of price quotation and subscription. These measures will promote prudent price quotations by offline investors.

Moreover, independent allocation mechanism will be introduced for lead underwriters. Lead underwriters may allocate shares issued offline to their clients according to the principle made publicly available prior to such allocation. In order to develop long-term clients, lead underwriters need to set reasonable pricing in order to balance the interests of buyers. This is favorable to preventing collusion between lead underwriters and issuers to set high prices.

Lastly, the CSRC will increase transparency of information in various processes including offering, pricing and allocation in order to enable such information to serve as the reference for online investors in their subscription decision-making and to prevent under-the-table dealings in pricing and allocation processes by means of enhanced public supervision; and

Third, to enhance supervision and deter pricing violations. Regulatory authorities will work together with self-regulatory organizations to enhance supervision of price quotation and pricing processes and crack down on such activities as high price quotations without purchase of shares, high price quotations with limited purchase of shares and collusion in price quotations. Meanwhile, measures will be taken to crack down on the speculation on new shares, as overpricing gives rise to a higher risk of dropping below the offering price after IPO.

Prevention of “three-high” problems and “money encirclement” requires investors to carefully read information disclosure documents of issuers, make rational investment decision-making and use their investment rights to restrain issuers.

Q7: In which aspects does this round of reform enhance the responsibilities of intermediary agencies?

A: Intermediary agencies are the goalkeepers of the securities market. Their due diligence directly determines the quality of information disclosure from issuers. In order to further enhance the due diligence of intermediary agencies, the Opinions has introduced the following measures:

First, to further clarify the independent responsibilities of such securities service agencies as sponsors, accounting firms, law firms, asset evaluation agencies and their personnel in the process of offering and demarcate the boundary of responsibilities;

Second, to advance information disclosure obligations. Since the submission of offering application documents, intermediary agencies should be responsible for information disclosed by them. This will change the previous situation where intermediary agencies are responsible for document submission, review departments are responsible for document revision and the quality of application documents does not affect final offering, and will also greatly curb the impulse of intermediary agencies to rush to submit applications or to re-submit applications;

Third, to clarify the compensation liabilities of intermediary agencies in the event of major violations in connection with information disclosures. Where major violations in relation to the issuer’s information disclosure have caused losses to investors, intermediary agencies including sponsors, accounting firms and law firms must compensate for the losses of investors in accordance with the law;

Fourth, to introduce the mechanism of independent allocation for lead underwriters, hold lead underwriters accountable for the investment losses of their clients, and urge lead underwriters to balance the interests between issuers and clients in pricing. In addition, information disclosure requirements are strengthened and public supervision is enhanced to prevent tunneling through under-the-table dealings;

Fifth, to enhance process supervision. Drawing upon the experience of financial special inspections in this year, the due diligence of relevant intermediary agencies will be spot checked in review process. Once discovered, suspected major violations will be immediately transferred to the enforcement department. The intensity of inspection on such activities as road show promotion, disclosure of investment value analysis report and independent allocation of underwriters will be enhanced;

Sixth, to enhance the intensity of penalty with respect to major changes between latest performance forecast and data and previous performance forecast or history performance data. Once such changes are confirmed, the offering applications recommended by relevant sponsor s will not be accepted and the case will be transferred to the enforcement department for investigation; and

Seventh, to publicly disclose information about credit record and business performance of intermediary agencies. In the future, information of the CSRC, the Securities Association of China (SAC) and securities exchanges will be consolidated and the business performance record of intermediary agencies and practitioners will be depicted and disclosed to the public so as to restrain any illegal business activities of intermediary agencies.

Q8: After the release of the Opinions, will new offering be approved immediately? According to the provisions s of the Opinions, does it mean that IPO review will be completed within three months for over 760 enterprises under review?

A: All enterprises must meet the requirements of the Opinions before making an IPO. After the release of the Opinions, a series of preparations should be completed before companies are permitted to make an IPO and get listed. These preparations mainly include:

First, supporting rules and measures should be issued and reform requirements implemented. For instance, the CSRC will revise the Measures for the Administration of Securities Offering and Underwriting, develop measures for transfer of existing shares, and improve information disclosure rules; securities exchanges and securities depository and clearing companies should develop detailed rules for the implementation of online allocation of new shares; securities exchanges should release documents and adjust their trading systems, improve the formation mechanism for opening price on the first trading day of new shares and the mechanism for the trading of new shares during the early stage of listing and establish the mechanism for suspending treading on the first trading day with the IPO price as the benchmark for comparison; and

Second, enterprises that have passed the review of the Public Offering Review Committee should revise application documents as necessary according to the requirements of the Opinions and perform relevant procedures. For instance, issuers should convene shareholders’ meetings to determine the plan of current public offering, including the quantity of new shares to be offered and existing shares to be transferred, and develop a share price stabilizing plan; responsible entities including controlling shareholders should make commitments pursuant to the requirements of the Opinions and reveal their commitments in the prospectuses. In line with relevant provisions s of the Company Law, it takes about one month for issuers to complete relevant procedures.

After completion of the above-mentioned preparations, enterprises that have passed the review of the Public Offering Review Committee should submit updated offering application documents to the CSRC and perform regulatory procedure for post-review matters. Where enterprises are free from the 17 major post-review matters required to be resubmitted to the Public Offering Review Committee for review, the CSRC will approve their IPO applications in accordance with the provisions of the Opinions and their supporting measures.

Currently, a total of over 760 enterprises are in the IPO pipeline. After the release of the Opinions, we will schedule review activities according to the queuing sequence of candidate enterprises. The completion of review activities for 760 enterprises is expected to require about one year.

Q9: What will be the impact of IPO resumption on the market and will it divert capital from the secondary market?

A: Ever since its establishment, China’s stock market has experienced eight IPO suspensions and seven IPO resumptions. On the first trading day after the previous seven IPO resumptions, the Shanghai Composite Index dropped for five times and went up for two times. Judging by the reality, IPO resumption will not determine the medium and long-term tendency of the stock market, whose operation is mainly decided by then economic fundamentals and macroeconomic policies.

Market-based pace of offering does not mean that over 80 enterprises that have passed the review of the Public Offering Review Committee will immediately complete the process ofIPO . They should revise application documents as necessary according to the new reform opinions and perform relevant procedures. Those that fail to complete these activities prior to January 31, 2014 will have to provide the latest financial data and submit the audit report of 2013. Enterprises and underwriters also need to seek appropriate offering time window. Some enterprises that have passed the review of the Public Offering Review Committee cannot obtain approval documents given that their intermediary agencies are under investigation. In general, it takes a certain period of time for enterprises that have passed the review of the Public Offering Review Committee to complete the IPO.

As important market participants, investors should fully exercise buyer restraint, carefully read information publicly disclosed by issuers, independently assess the investment value of the issuers and make prudent investment decisions. It is said in the market that, after a long period of IPO suspension and special financial inspections, enterprises currently still under review are all in good standing and there is a huge amount of capital waiting for new share speculation. It is important to remind investors that according to the information disclosure-based requirements, regulatory authorities will not assess the profitability and investment value of IPO companies. This round of reform has also spelled out targeted measures for the speculation of new shares and investors are advised to carefully assess investment risks, make prudent investment decisions and avoid misguided participation in new share speculation.

Q10: What are the policy considerations behind the launch of transfer of existing shares? What are the highlights of supporting measures?

A: Transfer of existing shares has been launched to enable shareholders of IPO companies to sell existing shares to the public in the IPO process. First, it can increase the quantity of tradable shares of newly listed companies and ease the limited tradable volume of individual shares upon listing; second, transfer of existing shares can restrain high price quotations by buyers, further facilitate the trade-off between buyers and sellers, and promote reasonable pricing of new shares; third, the launch of existing share transfer can alleviate the problem of excessive fund-raising; and fourth, it will ease the impact of concentrated circulation of existing shares on the secondary market after IPO.

The supporting measures have the following priorities: existing shares planned to be transferred should be in the possession of existing shareholders for over 36 months in order to prevent the existing shareholders from quick cash-out. After transfer of existing shares, neither the company’s equity structure shall not experience major changes nor shall a change occur to the actual controllers in order to prevent the stability of the corporate governance structure from being affected, which is unfavorable to corporate operation. Companies should determine in advance the total quantity of shares to be publicly offered and the upper limit of existing shares to be transferred. Quantity of new shares to be offered should be reasonably determined according to the book-building results and the capital demand of any projects into which the proceeds from the IPO will be invested. This will curb excessive fund-raising and stabilize investors’ expectation and make reasonable price quotations. In addition, requirements on the business operation of intermediary agencies and relevant information disclosure requirements are also included.

After the official release of the Opinions, the CSRC will release supporting documents at the earliest possible time and companies planning to transfer existing shares after IPO resumption should follow the requirements of supporting rules.

Q11: Why does this round of reform require that investors participating in online share allocation hold non-restricted shares?

A: In the process of soliciting public comments, we have received many suggestions on the allocation of shares at market value. Hence, we modified the method of online allocation accordingly and stipulate that “only those investors in possession of a certain quantity of non-restricted shares are permitted to take part in online subscription and allocation and lot drawing of online subscription shall give overall considerations to the market value of unrestricted shares held by investors and the cash amount of subscription”.

The method of online allocation identified in this round of reform is somewhat different from the former allocation of shares at market value and thus is not a simple resumption of previous practice. The differences are as follows: (1) possession of a certain quantity of non-restricted shares of listed companies is a criterion for participation in online allocation; (2) online allocation is not made in proportion to the market value of non-restricted shares of listed companies possessed by shareholders; (3) online allocation should give consideration to the market value of non-restricted shares of listed companies and the cash amount of subscription, requiring payment before allocation.

This requirement is based on the following considerations: first, to encourage long-term possession of shares by the secondary market investors and reduce the impact of new share subscription on the secondary market; and second, to balance the interests of investors in the primary and secondary markets.