China’s capital market regulators have initiated a comprehensive review of the pricing mechanism for initial public offerings (IPOs) following an avalanche of criticism.
Media commentators and analysts have criticised the “underpricing” of firm’s ‘A’
HONG KONG: China’s capital market regulators have initiated a comprehensive review of the pricing mechanism for initial public offerings (IPOs) following an avalanche of criticism over some controversial aspects of the sizzling stock offering of state-owned oil-and-gas giant Petro China in Shanghai in November.
PetroChina’s mainland debut, at the height of a frenzied bull run in China’s stock markets, had propelled the company to the status of the world’s largest by market capitalisation, exceeding $1 trillion. Against an offer price of 16.7 yuan, the company’s ‘A shares’ (as opposed to ‘H’ shares listed in Hong Kong) peaked on the first trading day at 48.62 yuan. But, they have since been sliding down, in line with the larger market, and on Monday, were trading at 31.04 yuan, down 36% from that
dazzling debut.
Many retail investors, who applied for but were not allotted shares in the IPO, rushed in to buy the stock on its listing, and have had their fingers burnt in the precipitous fall since then.
But it isn’t just the investors’ heartburn that is searing one of the most spectacular IPOs of 2007. Media commentators and analysts have criticised the “underpricing” of PetroChina’s A shares, which they see as the root cause of a larger problem. So raucous has their criticism been that regulatory authorities have been compelled to take note of it and order a review of the pricing policy.
A World Bank analysis, too, has noted that the “heavy underpricing of IPOs” represents a loss to the state in terms of “forgone revenues.” But the problem in China is that it is not the hand of the market, but a securities regulator, that determines IPO pricing.
The absurd valuation in the case of PetroChina was driven in part by the distortion of an illiquid stock in a crazed market that is blind to financial fundamentals. For instance, just 14% of PetroChina shares are traded, and the Shanghai offering accounted for only 2% of outstanding equity.
This is why China’s investors, starved of good investment opportunities, pounced on the premium scrip like a pack of wolves and stretched notional valuations to more than double that of the next biggest company, ExxonMobil.
The IPO allotment process, too, is seriously flawed - in that institutional and individual investors compete for allotment on the same playing field as “equals”, which they clearly aren’t.
For instance, with the PetroChina IPO, it transpired that institutional investors secured allotments through private placements and in the public quota, and sold heavily immediately after listing.
One other aspect of the PetroChina IPO process also came in for criticism, centred around Swiss investment bank UBS, which faced charges of “insider trading.”
Chinese media reports last week alleged that UBS had unduly profited from its role as a sponsor of PetroChina’s A-share IPO in November - by trading in PetroChina’s H shares on the Hong Kong stock exchange.
The reports further alleged, citing officials in the securities regulatory body, that some 10 companies controlled by UBS had “manipulated” PetroChina’s H shares before the company issued its A-share prospectus. UBS denied the allegations, saying that “at this stage, UBS does not believe that they have any merit whatsoever.”
Even so, the allegations point to the problems that arise when shares of a company are listed in two stock exchanges, which operate under different sets of rules. shares
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