The Beijing Stock Exchange's new listings can combine fund subscriptions with account allocations.

Ask AI · How can combining capital subscription with account-based allocation achieve a win-win outcome?

Since last December, rumors have circulated in the market that “the listing of the Beijing Stock Exchange (BSE) for value-based IPO subscription has entered an online testing phase.” Ever since then, concerns about revisions to the BSE IPO subscription rules have been a focus of market attention.

Although the above rumors have been confirmed as untrue, according to people familiar with the matter, the relevant parties had only conducted research into the situation beforehand—this is different from an official online testing. But such research is certainly not prompted by impulse. It indicates that the relevant authorities have already identified the shortcomings in the current BSE IPO subscription rules, and they also hope to refine the BSE’s existing subscription rules to eliminate these shortcomings in the subscription process.

At present, the problems exposed by BSE IPO subscriptions are very clear. Currently, BSE IPO subscriptions use a capital subscription mechanism: the larger the amount of funds subscribed, the higher the chance of getting the winning quota. This is both an original form of IPO subscription and also a crude one—what it comes down to is who has more money.

The problems with this capital subscription-based IPO subscription model are very obvious. First, it is not conducive to protecting small and medium-sized investors. After all, small and medium-sized investors have limited funds. Under this kind of original capital subscription model, small and medium-sized investors are clearly at a disadvantage. Moreover, even if small and medium-sized investors put everything they have into subscribing—using several hundred thousand to several tens of thousands of yuan—they still find it difficult to obtain winning quota opportunities. To a certain extent, this again harms the interests of small and medium-sized investors. After all, if small and medium-sized investors do not use their funds for IPO subscriptions, they can use that money to invest in stocks and thereby gain opportunities to make profits. Even if they only do government bond reverse repos or buy money market funds, investors can have some returns to varying degrees. But participating in BSE IPO subscriptions gives small and medium-sized investors nothing in return—this subscription system is obviously not favorable for protecting the interests of small and medium-sized investors.

Second, this capital subscription-based IPO subscription model at the BSE has caused significant waste of stock market resources. Precisely because the model is determined by financial strength, during new share subscriptions many investors put everything they have and commit all available funds to IPO subscriptions, resulting in a “spectacle” in which thousands of billions, or even tens of trillions, of yuan of funds participate in IPO subscriptions. For example, in the new shares issuance of Meditron (Meidile), the amount of online valid subscription totaled as high as 1.06T yuan—surpassing the trillion-yuan mark—while the company’s initial fund-raising scale was only about 6.7 billion yuan. The extensive waste of subscription funds is evident.

How can the drawbacks of the BSE’s capital subscription IPO subscription model be eliminated? Naturally, investors would think of the IPO subscription model used by the Shanghai and Shenzhen exchanges: value-based allocation. After all, the Shanghai and Shenzhen exchanges have also used a capital subscription mechanism in the past—for example, during the IPO subscriptions of China Shenhua and China Petroleum in 2007, the frozen capital amounts were as high as 2.66 trillion and 2.57 trillion yuan, respectively. Therefore, the Shanghai and Shenzhen exchanges reformed their IPO subscription system: replacing capital subscription with value-based allocation. After investors obtain the winning quota in the value-based allocation, they then pay for and subscribe for the new shares. In this way, the problem of resource waste is addressed, and even if investors do not get a winning quota, there is no damage to their interests.

It is precisely for this reason that, in the face of the problems triggered by BSE IPO subscriptions, many investors and industry practitioners have suggested that the BSE also adopt a value-based allocation IPO subscription model. But the reality is that the BSE has a limited scale and the overall market has relatively small stock market capitalization, so it is not suitable for value-based allocation. As of February 27, the total circulating market value of all stocks on the BSE is only 670M yuan, which is even less than the circulating market value of a single stock such as Agricultural Bank of China, Industrial and Commercial Bank of China, Kweichow Moutai, or Ningde Times. Therefore, BSE IPO subscriptions are not suitable for value-based allocation, and capital subscription is a choice the BSE has no choice but to make.

However, capital subscription can also move away from crude IPO subscription practices—by combining capital subscription with account-based allocation. On the one hand, BSE IPO subscriptions still use the capital subscription approach; on the other hand, it is necessary to limit the amount that each IPO subscription account can apply for. For example, it could stipulate that each IPO subscription account can subscribe for a maximum of 5,000 shares (the allocation quota can be adjusted according to the scale of the IPO issuance). In this way, the amount of subscription funds spent by any single IPO subscription account is controlled, and the situation of massive funds participating in IPO subscriptions will no longer occur. This not only avoids the enormous waste of IPO subscription funds, but also allows more IPO subscription accounts to have a chance to obtain winning quota for new shares—benefiting the protection of the interests of broad small and medium-sized investors. It is truly a “win-win,” or even a “multi-win” approach.

Author statement: personal opinion, for reference only