CSRC will need to show teeth in time

The China securities watchdog, the China Securities Regulatory Commission, reportedly conducted a series of seminars in Beijing recently for selected stockbrokers and investment bankers to brief them on the new IPO rules that, as expected, are based on the concept of self-regulation in disclosure and pricing.

Some participants were quoted as saying that the CSRC officials obviously tried their best, at the risk of sounding like broken records, to beseech their listeners at the seminars that it's the market participants' obligation to voluntarily observe the standard laid down in the new code.

CSRC's concern is understandable on the eve of the lifting the almost 12-month moratorium on IPOs. Market experts expect that there will be more than 200 mainland enterprises seeking to raise capital by issuing new shares for sale to the public in 2014. They are expected to raise a total of about 170 billion yuan ($27.85 billion) from their IPOs.

The ban on IPOs was imposed in early 2013 partly because of widespread investor concern about the drain of capital from the moribund stock market. Another major consideration of the CSRC was the fact that some newly listed companies had seriously underperformed in relation to the forecasts they made in their prospectus, indicating the shortcomings in enforcing disclosure requirements.

Such irregularities that have discredited IPOs in the minds of many investors have apparently brought the CSRC around to the view that the approval principle of the existing regulatory system has failed to work. One option was to replace it with a system based on self-regulation that is similar to those of other major markets, including Hong Kong, London and New York.

This was the option eventually favored by CSRC. In the past several months, the CSRC has been explaining its thinking and actions on its own and various other websites and in numerous public forums. But despite the securities watchdog's efforts, there have been lingering doubts whether the market is ready to play according to the new rules.

Of primary concern is that institutions, including stockbrokers and investment banks, which have never before seen the need to develop a culture of self-discipline and the mechanism of internal control, will find it hard to fit into the new regulatory environment. It seems that the CSRC is determined to keep to its own timetable for the resumption of IPO issues, which is early 2014.

But it is also allowing time for the institutions to adjust by adopting the approach of moral persuasion. This means that institutions which are found to have failed to meet some of the requirements stipulated in the new code will get at the most a slap on the wrist rather than face criminal charges as is the case in, say, Hong Kong.

Some analysts may scoff at the CSRC for failing to arm itself with legal teeth in its attempt to restore the credibility of the new share market. Judged by the inexperience of the institutions in self-regulation, it seems wise to allow them a period of adjustment and learning before clamping down on offenders who may have made the mistake out of ignorance rather than malice.

However, for the sake of an orderly marketplace, it is hoped that moral persuasion is a short-term arrangement that will be replaced in a short time by laws that are tough enough to deter deliberate offenders.