China's stock market has long been compared to a casino, with cooking of the books not unheard of. Now, imagine you lose a fortune in the casino and someone volunteers to reimburse you your losses.
That's exactly what has happened to 13,426 investors who bought into Wanfu Biotechnology. Its IPO sponsor, Ping An Securities, offered them 300 million yuan (HK$380 million) after Wanfu admitted inflating its pre-IPO profit by 90 per cent.
It's an important case that reflects the subtle changes going on in China's financial industry. Most noteworthy is that it was not initiated by the regulator.
"People are angry. You don't know where that anger will lead to," said an insider. "Something has to be done."
Indeed. China's IPO market has become a money pit. Its GEM board is even more so. More than 220 of its 350 listings have dropped below their IPO prices following massive sales of stock by company management and various fraud reports.
All fingers are pointing at Ping An Securities. Fraud has been uncovered in three IPOs it has sponsored, with one of them being Wanfu.
The regulator banned the firm from sponsoring IPOs for three months and fined it 76 million yuan. Though the penalty was the severest so far, investors still found it lenient. They pointed to a similar case in Hong Kong in which the sponsor and its responsible officer had their licenses revoked on top of being fined HK$42 million. The management of Ping An then proposed to reimburse investors the losses they suffered because of the fraud plus fees and interest. It was no easy sale to the board, given the implications for the two other dodgy IPO sponsorships. And it would not have been possible had the firm had dozens of shareholders or one state-owned controlling shareholder like most of its peers.
Ping An Securities is owned by Hong Kong-listed Ping An Insurance. Approval was secured within days. After all, access to one of the world's largest stock markets is worth a lot, much less than any compensation. The estimated cost to Ping An is no more than 180 million yuan.
In China, putting money on the table does not make you the boss.
The China Securities Regulatory Commission has been tightening its grip on IPO quality and sponsor conduct. Still, an unprecedented compensation sum unnerved them. What about the expectations the offer has raised?
Will state-owned investment banks be expected to pay compensation for their mistakes as well? Will there be a backlash if the offer is not well received?
After talks, an informal blessing for the offer came in the form of participation by the Shenzhen Stock Exchange and the semi-official Securities Association of China in the arrangement.
The management of Ping An visited 32 brokers and called 64 others to secure their help in contacting the "victims" and working out the losses suffered. Without this help, a high acceptance rate would have been impossible.
These brokers had every reason to say no. Why help a competitor? What if the firms these brokers sponsored lied about their numbers? Why set a precedent and raise expectations?
Ping An visited 32 brokerages nationwide to lobby for their support. Interestingly, only one major firm expressed concern about the possible repercussions of agreeing to help.
"Ping An is one of the few that can make such an offer," said an officer of one of the brokers. "If Ping An fails, it will be a bad for everyone because the only option left would be a heavier penalty."
Two weeks after the offer was made in late May, 86 per cent of those who invested in Wanfu's IPO had accepted. They will share 169 million yuan in compensation - 96.5 per cent of the total. Official endorsement came on June 8 when China Securities News dedicated a page to the incident, quoting every party on how they helped make it a success.
Will such compensation become the norm? No. But let's not underestimate the power of raising expectations.