Oct 30, 2014 04:07 PM

Closer Look: CSRC Should Review Its Approvals-Based IPO System

(Beijing)– A recent decision by the Ministry of Environmental Protection to end assessment reviews before a company's initial public offering is seen as a step toward a reform that involves switching from an approval-based listing procedure to one based on better information disclosure.

The need to get approvals from various different government agencies has long been criticized for posing a hurdle to companies seeking a public listing and creating room for "rent-seeking," or corruption.

For instance, in addition to the environmental assessment, the China Securities Regulatory Commission (CSRC) requires IPO hopefuls to get proof from the National Development and Reform Commission (NDRC) that they meet the requirements of the government's industrial policies.

The CSRC has also demanded opinions from the Ministry of Housing and Urban-Rural Development for listing applications related to the property sector.

The environmental assessment was designed to raise companies' awareness of the need to protect the environment and give that ministry a stronger voice. However, in practice, the effect has been limited.

Publicly listed companies are closely scrutinized by investors. Whether or not they meet environmental standards will affect their image and value. Amid greater concerns about environmental protection from both the government and public, polluters will face risks associated with government policies and higher costs for cutting emissions.

If government supervision and mechanisms guaranteeing proper information disclosure are in place, such companies will naturally lose out in the market.

Environmental protection authorities should be in a position to better supervise companies' information disclosure practices and leave the rest to the market. The CSRC should also pay attention to punishing firms that disclose fake information.

The environmental assessment review is not legally compulsory, so eliminating it is easy. However, the Securities Law says companies should meet the requirements of industrial policies when applying for an IPO. This is seen as the legal basis for the NDRC's involvement in the listing process.

The problem is that the judgment of government agencies may lag behind market changes. Industrial overcapacity and weak competitiveness are often the result of government involvement in business, as was seen in the solar, animation and electric car industries.

It is time for the CSRC to decide whether it should trust industrial policy or the market.

(Rewritten by Han Wei)

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