Tying Profit to Duties Performed by a Sponsor

In order to tie the profit to duties performed by a sponsor, we must first ensure that the duties of the sponsor can basically be performed. According to the provision of article 29 of the Interim Measures for the Stock Issuance and Listing Sponsorship System, the period of continuous supervision and guidance for an issuer of initial public offer of stocks is the remaining time of the current year of the listing of the securities plus the following two complete fiscal years. For a listed company who issues new stocks or convertible corporate bonds, the period of continuous supervision and guidance is the remaining time of the current year of the listing of the securities plus the following one complete fiscal year. The period of continuous supervision and guidance begins the day of the listing of the securities. This provision shows that the term for sponsors is currently too short for them to perform their sponsor duties. The term of sponsors should be extended to a lifetime position. Implementing a lifelong sponsor term can subject a listed company to continuous supervision, examination, and guidance from the sponsor as long as it remains listed. This is of great importance to preventing breaches of laws and regulations by listed companies, thus improving the quality of listed companies and protecting the interests of investors.

The performance of a sponsor's duties should also be provided with the following incentives:

Underwriting expenses should be determined by the market and a payment system should be established for the costs of continuous supervision. Sponsor institutions should be encouraged to establish and maintain a good market reputation and improve the quality of their sponsoring business. Relevant regulators should loosen their control on underwriting fees and establish a market-based underwriting service pricing mechanism. Underwriting services can then be priced to sufficiently reflect the quality of the sponsor business and the value of reputation capital. Sponsor institutions can get return and compensation from their investment in reputation and efforts to improve the quality of the sponsoring business. This in turn creates the conditions for streamlining the relationship between the reputation of sponsor institutions and the quality of continuous information disclosure supervision. A continuous supervision fee payment system should also be established with the criteria based on the quality of the continuous supervision business. This would encourage sponsor institutions to improve the quality of the continuous supervision business.

- A long-term incentive mechanism should be applied to the salary of sponsors to encourage and guide them into long-term behaviors. For example, if the sponsor exaggerates the investment value of the issuer in order to drive up the issue price and the share price ends up lower than the valuation, it might help to require the sponsor to buy a certain proportion of the shares from the secondary market and not cash out until the price approaches the upper limit of the valuation. This can prevent the sponsor from arbitrarily valuating and thus affecting institutional bidders.

- Within its organization, the sponsor institution should transform its incentive mechanism for sponsor representatives. It is worth considering the idea of strengthening the independence of sponsor representatives, changing the operation mode of sponsor institutions, and providing incentives for the work of sponsor representatives through limited partnership or the business director system. This would tie their incomes to the proper operation and long-term prospects of the sponsor institution. The sponsor representatives would thus consciously follow standard sponsoring practices.

< Prev   CONTENTS   Next >