Across The Border

Regulator tightens scrutiny of IPOs

CSRC vows to weed out any unqualified new share issues

PUBLISHED : Thursday, 30 June, 2016, 3:49pm
UPDATED : Thursday, 30 June, 2016, 10:51pm

China’s securities regulator has launched a new inspection campaign to weed out unqualified listing applicants, in a move to further quell fears of an equity influx amid the slumbering stock market.

Officials say the latest effort is aimed at reducing the number of initial public offering (IPO) applications, and is being dubbed the most stringent examination ever launched by the authorities on companies’ balance sheets, and on information disclosure.

The China Securities Regulatory Commission (CSRC) said last weekend it was aware of the serious damage fraudulent IPOs were having, ranking them as one of the three biggest drags on the healthy development of the mainland’s stock market, along with insider trading and fraudulent earnings.

The latest initiative follows a similar clampdown four years ago, and reflects the regulator’s renewed efforts to soothe investor concerns over a huge backlog of listing applications.

Experts suggest it is likely to force more than 200 prospects to voluntarily withdraw their fundraising plans.

In 2012, the CSRC took action against a so-called “quake lake” of IPOs lining up to float on the two stock exchanges – with nearly 300 firms eventually abandoning their plans.

In normal circumstances, the securities regulator would attempt to slow down or suspend IPO approvals to ease market fears about a liquidity drain resulting from a fresh injection of equities.

After taking office in March, CSRC chairman Liu Shiyu has been tasked with maintaining market stability following a market rout last year.

But he had been under growing pressure to deal with the latest backlog of IPO applications, created by cash-hungry businesses eager to raise much-needed funds to combat the economic slowdown.

About 800 companies are believed to have filed IPO proposals to the CSRC despite a slowing approval process.

According to global professional service company EY, 63 new listings were conducted on the mainland’s A-share market in the first half of 2016, which raised a total US$4.9 billion of proceeds.

That amount represented an 80 per cent drop from the same period last year, when 187 IPOs netted US$23.7 billion worth of funds.

“The regulator will continue to control the pace of the IPO issuances now that market stability has been given priority,” said Wang Yang, a partner at EY.

“This latest examination campaign is likely to kick out applicants without solid earnings or those that fail to meet the information disclosure requirements.”

The CSRC’s policies on IPOs have long been criticised by investors and companies due to their inconsistencies.

Before last year’s June market crash, the regulator attempted to embark on a registration-based IPO mechanism to ease approval procedures, while letting more firms raise funds to support the real economy.

The regulator put that new IPO system on ice, however, as it tried to stem further slides in weakening stock prices.

The U-turn on its IPO policy was regarded at the time as a move to stall broader market-based reforms, after Liu replaced former CSRC chairman, Xiao Gang.

Despite criticism at the time that the new chairman was back-peddling, and remained reluctant to carry out planned reforms, sources close to the CSRC said he was determined to show his reformist outlook and planned a series of liberalisations.

In the end, he was left with no choice but to suspend nearly all the major reforms planned, including on IPOs, in favour of measures to simply underpin the market.

All eyes will be on the next step [CSRC chairman] Liu [Shiyu] takes to reform the market. After all, the fundraising function of a stock market has to be resumed
He Yan, hedge fund manager at Shanghai Shiva Investment

It is likely that some of the country’s priority industry sectors, such as pharmaceuticals, will be given preferential treatment by the CSRC this time round, with applying companies allowed lower IPO earnings thresholds.

Before last year’s market crash, China’s leadership had hoped that more small technology firms could gain easier access to stock market funding, as part of its ‘New Normal’ economic model, where innovation is identified as a pillar of development and firms are encouraged to move Chinese-made products up the value chain.

“All eyes will be on the next step Liu takes to reform the market,” said He Yan, a hedge fund manager at Shanghai Shiva Investment.

“After all, the fundraising function of a stock market has to be resumed.”

Through the latest examination campaign, the regulator is also expected to reinforce its message of zero-tolerance towards earnings fraud, which some already think has hurt the interest of millions of retail investors.

It is expected the regulator will also enlist the help of intermediaries such as accounting and law firms to ensure careful inspections into the listing documents submitted by applicants.