Sponsors and underwriters of initial public offerings on China's new science and technology board in Shanghai will need to invest their own money and hold the stocks for at least two years, according to guidelines unveiled by the Shanghai Stock Exchange on Tuesday.
The new regulations are also an attempt by the capital market regulator to impose stricter controls on brokerages, said market insiders.
According to the guidelines, sponsors will need to invest between 2 and 5 percent of their money on shares floated by their clients, depending on the various sizes of the IPOs, with the cap on such investments set at 1 billion yuan ($149.5 million). The sponsors are required to hold the equity stakes in these companies for a period of 24 months.
The bourse had earlier said that these requirements were necessary to restrict the number of sponsors with capital and stake limits. Such regulations will also prompt brokerages to choose the truly qualified companies for the new tech board, thereby bringing profits to investors and the market in general.
Yan Feng, chairman of Guotai Junan International, explained that such requirements also help to control risks at an early stage.
Under the newly released guidelines, the sponsors' legally established alternative investment companies are allowed to make the investment.
According to Sun Jinju, research director of New Times Securities, sponsors and their subsidiaries are banned from subscribing to new shares at the other boards in China's A-share market. Similar measures were earlier adopted by the growth enterprise board of the South Korean stock market, which required major underwriters to buy 1 percent of their clients' shares and hold them for at least 12 months.
"Sponsors will come up with a more reasonable pricing mechanism for their IPOs due to the new regulation," said Sun.
Jiang Qijia, a senior analyst at Shanghai-based financial service provider Noah Holdings Ltd, said that investors who hold 5 percent or more in a company listed on the main board of the A-share market are considered as major shareholders. Such investors are obliged to make information disclosures. Under the new guidelines for the tech board, the sponsors may not necessarily become the major shareholders but they will have a say in the companies' decisions to some extent, he said.
With the first batch of applications released in late March, a total of 79 companies have submitted their applications for the new tech board by Wednesday. China Securities, CITIC Securities and China International Capital Corp are among the major IPO sponsors, according to public information. As calculated by Guangzhou-based investment consultancy Guangzheng Hang Seng Advisory, the three companies will have to invest at least 502 million yuan, 362 million yuan and 481 million yuan respectively on their clients.
But this will also put more pressure on securities firms. Leading public brokerages have been busy issuing additional stocks tailored for their sponsor business. Public information showed that the financing plans released by listed brokerage firms have amounted to over 100 billion yuan since the beginning of this year.