The China Securities Regulatory Commission (CSRC) on May 17 2001 unveiled the long-awaited online price bidding proposal, a new mechanism of price fixing in initial public offerings (IPOs). The proposed scheme is intended to allow market forces of supply and demand to determine the price of primary securities offerings.
As an alternative to the existing mode of price fixing, which is effected exclusively by the issuer and underwriter, the proposed scheme enables all potential investors to play a part in arriving at the issue price. Its essential features are that:
- all trading will be conducted through the stock exchanges trading system with the lead underwriter being the sole vendor;
- the issuer and lead underwriter will decide the base price of the shares to be issued - potential investors are then free to bid for the shares;
- the maximum number of shares for which a bid can be made will be capped at 0.1% of the total of shares to be issued;
- the ultimate issue price will be determined by one of the following means:
- fixing the issue price at the mean of all bids; or
- ranking the bids from the highest bidding price to the lowest, and satisfying those bids on top of the rank until all the shares to be issued are fully allotted. The ultimate issue price will then be fixed at the price level where the lowest successful bid lies; or
- similar to (ii) but after the bids-ranking process, the issuer will first eliminate from the ranking list bids (starting from bids with the top-bidding price) which together account for the top 10% (or more, as determined by the issuer) of the total number of shares for which bids are placed.
With this proposed scheme, behind-the-scenes manipulation of price fixing might be stemmed as the ultimate issue price will be determined by and reflective of market conditions. Investors will additionally be awarded greater transparency in the price fixing process.
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