China’s securities watchdog mulls tougher measures to curb fraud in A-share listings

CSRC vice chairman says the regulator is considering revoking licences from brokerage companies involved in fraud, a move analyst say is long overdue

PUBLISHED : Wednesday, 27 July, 2016, 4:04pm
UPDATED : Wednesday, 27 July, 2016, 9:56pm

A top official with China’s securities watchdog said authorities may revoke investment banking licenses held by mainland brokerage companies if they are found to be involved in fraud, a move some analysts said is needed to curb the misleading information disclosure that pervades the A-share market.

China Securities Regulatory Commission (CSRC) vice chairman Li Chao said the regulator was considering revoking licenses for initial public offering (IPO) sponsorships if brokerages were found to be involved in fraud during the listing process, according to a report by Brokerage China, an online publication under state-owned Securities Times.

Currently, brokerage companies found guilty of fraudulent activities only receive fines and a suspension of their investment banking business. Analysts have long criticised this lenient approach as the main reason for the prevailing environment of fraud and misleading information disclosure on the mainland’s A-share market.

“Some brokerage companies carry out insufficient verification and examination into the initial public offering (IPO) candidates, while the sponsorship letters they issue have fake information, misleading statements or major omissions,” said Li, who made the comments during a recent training session of industry professionals on Tuesday, according to Brokerage China.

Song Qinghui, an independent economist based in Beijing, said the only effective way to get the attention of the brokerage companies was by “revoking the investment banking licenses for the misconduct”.

Some brokerage companies carry out insufficient verification and examination into the initial public offering (IPO) candidates
Li Chao, China Securities Regulatory Commission vice chairman

He said the current rating system used by the CSRC to regulate brokerage companies was too loose.

In mid July, the CSRC announced it had downgraded more than half of the mainland Chinese brokerages in an annual review based on their compliance management and risk control. The assessment did not look at their assets and credibility.

The downgraded companies will receive more frequent and stricter checks from regulators, and will have to sink a higher proportion of their revenue into the investors’ protection fund which is managed by a specialised company under the CSRC.

Song said that because the regulator’s rating system was not publicly released it would be impossible to quantify misconduct by a certain brokerage company based on its rating.

“For example, some brokerage firms have been warned and fined by the regulators constantly last year. But it did not affect their rating,” he said.

In June, Southeast China’s Fujian based Industrial Securities was found to be involved in IPO fraud with a company it sponsored in 2011. However, as punishment the brokerage was only ordered to temporarily suspend its investment banking business, fined 30 million yuan (HK$34.91 million) and had its fees from the listing, worth 32.78 million yuan, confiscated.

The company was downgraded to BBB from AA, above the D and E categories indicating alarming levels of risk.

“The current rating system lacks deterrent power. It is worth thinking about why brokerage companies will face lawsuits and be forced to close down when violating the law, but in China they survive,” Song said.

During Tuesday’s training session CSRC’s Li also said the regulator would scrap its “caring” stance towards brokerage companies while carrying out supervision in a stricter manner, the mainland-based 21st Century Business Herald reported.

Zhang Wei, an analyst with Guotai Junan Securities in Shanghai, said this year’s shift to a stricter regulatory attitude from the securities watchdog was “more drastic than expectation”.

Under the former CSRC chairman Xiao Gang, the watchdog had pushed for a more liberalised regulatory approach to create a market-driven price setting environment for IPOs and share placements. However, the move was reversed after a market rout hit the mainland stock market last June, slicing 40 per cent off the value of the benchmark index over a period of several weeks. Liu Shiyu, a former central bank deputy governor, took over the position from Xiao and began to push for a more prudent regulatory style.

The CSRC has been introducing new rules to regulate financing activities in the market. In June this year it issued a set of detailed rules regulating back-door listings, prompting an increasing number of mainland listed companies to drop plans to revamp their business through share placements or via reverse mergers.

According to state-owned Securities Daily, 41 mainland-listed companies have cancelled their business restructuring plans following introduction of the rules three weeks ago.

Previously, listed companies tended to revamp their businesses to fit a hot new theme, like “Internet Plus”, or “entertainment”, as stocks categorised under these labels enjoyed higher valuations. Investors would flock in and push the share prices higher.