The Ministry of Justice, together with the Ministry of Finance and the China Securities Regulatory Commission (CSRC), has drafted new regulations banning the fees charged by intermediaries to be linked to the IPO results and prohibiting local governments from giving issuers or intermediaries listing rewards.
The Ministry of Justice, together with the Ministry of Finance and CSRC, has drafted the Provisions of the State Council on Regulating the Services Provided by Intermediaries for Companies' Public Offering of Stocks (Draft for Solicitation of Comments) (hereinafter referred to as the Draft), according to an announcement made by the Ministry of Justice on August 16. The Draft clearly states that the fees charged by intermediaries shall not be linked to the results of the offering and listing of stocks, and emphasizes that it is prohibited to accept listing rewards or other forms of illegitimate benefits.
The Draft sets out principles for intermediaries' professional practice and fee collection. Intermediaries shall work with integrity, due diligence, independence and objectivity, and shall not partake in illegal activities to assist unqualified companies in publicly issuing stocks. Intermediaries shall adopt a market-based approach to reasonably determine their fee standards.
Specifically, securities companies engaging in sponsorship business may charge staged fees proportional to the work progress, but whether or how much fees are charged shall not be conditioned on the results of public offering and listing of stocks. For underwriters, service fees shall be determined by evaluating project cost and other relevant factors in accordance with the regulations set by the state and industry authorities.
For accounting firms performing audits, service fees can be charged by stages based on the work done up to that stage, but whether or how much fees are charged shall not be contingent on the result of the audit or the public offering and listing of stocks.
Regarding the services provided by law firms in public offering of stocks, the Draft clarifies that fees shall be charged solely by law firms in strict compliance with regulations on lawyer service fees set by judicial administrative departments.
Industry insiders explained that local governments generally offer listing rewards ranging from approximately RMB 1 million to RMB 20 million in the year of listing to encourage companies to go public. Sometimes additional bonus may be offered by municipal and even district-level governments on top of the rewards given by provincial governments. Apart from rewards to the listing companies, local governments of some provinces, municipalities, and regions even offer one-off rewards to intermediaries like the securities companies, accounting firms and law firms that assist in the listing process.
The Draft proposes that local governments at all levels shall not grant rewards to issuers or intermediaries based on the results of public offering and listing of stocks. For local governments that reward issuers or intermediaries in violation of this requirement, such rewards should be recovered, and the responsible leaders and directly responsible personnel shall be disciplined by relevant authorities according to law.
In response to the Draft, some experts believe that an explicit ban on listing rewards will have a significant impact on the listing reward and fiscal subsidy policies strongly promoted by provincial and municipal governments. Policies that have already been rolled out are likely to be revoked, and relevant implementation rules will be needed to provide further clarification on the time limit, scope, and method of recovering such rewards.
The above information is provided for reference purposes only and does not constitute investment advice.
