Lenient stance on fraudulent firm riles investors

CSRC's decision to retain Nanjing Textiles' listing comes despite retail traders' calls for action

PUBLISHED : Tuesday, 27 May, 2014, 1:34am
UPDATED : Tuesday, 27 May, 2014, 4:28am

The mainland's securities regulator has been caught in the eye of the storm after deciding to maintain the listing status of a company found to have falsified its earnings for five years.

Investors vented their dismay at the China Securities Regulatory Commission when it failed to expel Nanjing Textiles Import & Export, a state-controlled trading firm, from the Shanghai stock exchange.

Nanjing Textiles was recently found by the CSRC to have overstated its earnings between 2006 and 2010, with the company and 12 officials fined a combined 1.53 million yuan (HK$1.92 million) for the wrongdoings, according to company statements. The company operated with losses in the six years from 2006 to 2011.

To the amazement of retail investors, the regulator said the company could still be traded on the Shanghai bourse despite growing calls for it to be thrown out of the stock market. On the mainland, companies reporting losses for three years in a row should be delisted.

CSRC spokesman Deng Ke told a press conference on Friday that the decision complied with the securities laws and regulations because the delisting standards factored out "adjusted" earnings or losses for previous years.

Retail investor Ding Ying said: "The regulator always has an excuse when it hopes to protect the listed firms. The ridiculous decision is not just about this company; it hurts all investors."

Ironically, the spokesman said the CSRC's stance on Nanjing Textiles was aimed at safeguarding the interests of its shareholders, because a delisting would see them incur losses.

The mainland has yet to establish a real delisting mechanism to ensure the overall quality of listed firms. Before 2012, only about 50 habitual loss-makers were delisted on the mainland, while most underachievers resorted to "asset restructuring deals" to book one-off gains to keep their listing status.

The CSRC published new delisting rules in April 2012 that promised tougher controls on loss-makers, stipulating that underachieving firms could no longer count on exceptional gains to avoid delisting. But it waived the rules three months later, phasing out the criterion on one-off gains.

Many loss-making firms are state-owned and a delisting could embarrass their state-owned parents and local governments.