An Unpopular IPO Rule Hands Chinese Banks Big Windfalls

When China rolled out its own Nasdaq-style listings venue last year, the country’s regulators forced investment banks to buy stocks in the companies they took public.

That unusual requirement for banks to eat their own cooking is now paying off big time.

In a measure meant to ensure underwriters brought good deals to market at fair prices, authorities required the most senior institutions on any deal on Shanghai’s Science and Technology Innovation Board, also known as the STAR market, to take part themselves. These banks, known as sponsors, must buy between 2% and 5% of the shares sold, up to a maximum of about $147 million, and then hold the stock for at least two years.

Chinese and foreign banks were wary of the risks this posed, not least because the country’s markets have experienced a series of booms and busts over the last decade and a half.