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November 13, 2017

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For companies, a hard slog to share sales

Companies in China that want to raise money by selling shares and going public have to run the gauntlet of tighter scrutiny nowadays.

A trial review committee set up by the China Securities Regulatory Commission in September is proving hard-nosed when it comes to approving new IPOs. At a meeting earlier this month, only one of six applicants got the nod.

For years, China has been trying to rein in malpractices in the nation’s share sales, including false and misleading statements by companies, inappropriate pricing and even unethical behavior by some members of the IPO review body.

The new, rigorous vetting will be beneficial to improving the quality of listed companies, according to Cinda Securities.

Several former members of the CSRC review panel are under investigation amid allegations related to the 2010 IPO of Leshi Internet Information & Technology. The company has been suspended from trading for several months because of heavy debt.

Questions are also being asked about the backdoor listing of anti-virus software maker 360 Technology via a 50 billion yuan (US$7.5 billion) reverse takeover deal with SJEC Corp, a listed elevator and escalator manufacturer.

Formerly named Qihoo 360, 360 Technology was delisted from the New York Stock Exchange in July 2016. SJEC has been suspended from trading for several months.

If a cleanup of the system is measured in the number of IPOs hitting the market, statistics seem to indicate that the campaign is working. Since July, the approval rate for new IPOs has been dropping steadily.

The new trial committee, called the Issuance Examination Commission of China Securities Regulatory Commission, has reviewed 36 applications, approving 20 companies, rejecting 13 and deferring three.

Most of the rejected companies were challenged on their viability for continuing operations. Among the reasons cited for rejection are dubious performance, lack of independence and uncertainty about future profitability.

“The regulator’s recent caution about systematic risks and investigations into suspected fraudulently listed companies forces the new committee to deal with IPOs more prudently — hence, a decline of the approval rate,” said Chen Li, director of research at Chuancai Securities.

At the same time, the review process for IPOs has picked up pace where it once was backed up or even suspended. The queue time for applicants has decreased to 560 days from 2.2 years in 2016.

“The new committee has accelerated the auditing process with improved systems and professional staff,” Chen said.

Tighter regulation will be the norm going forward, said Fu Lichun, director at Northeast Securities, and the investigation into possible past malpractices by regulatory review members feeds into that new structure.

Two of the former seven members of the IPO review panel who were involved in Leshi’s 730 million yuan IPO in 2010 are now being investigated, according to media reports.

It’s an echo of the case involving former CSRC senior official Li Liang, who was charged with helping nine companies, including Leshi, to obtain fundraising approvals in exchange for bribes totaling 6.9 million yuan.

The two men reportedly under investigation were “offering assistance” to facilitate the Leshi IPO, despite problems in Leshi’s corporate structure, governance and cash flow, industry officials and the media said.

By August, Shenzhen-listed Leshi had been involved in 33 ongoing lawsuits related to 1.62 billion yuan in unpaid debts.

Since 2016, Leshi parent LeEco was running short of money after investing heavily in smartphone and electric car development. LeEco founder Jia Yueting was found to have withdrawn capital from Leshi. He’s in the US now, avoiding the fallout and payment demands from banks and suppliers.

Leshi posted a loss of 640 million yuan in the first half, turning from a profit of 280 million yuan a year earlier. The company is being held up as a model of what went wrong in China’s IPO system.

China also tightened regulation on new share sales. Last week, 360 Technology announced it would return to China’s A-share market through a backdoor listing in Shanghai. Its plan seemed to draw support from the Chinese government because of the cyber-security nature of the company’s business. Still, the deal faces regulatory scrutiny.

SJEC and 360 Technology are required to answer 12 questions within several days, covering 360’s business model, results, forecasts and share structure, the Shanghai Stock Exchange said in a statement last week.

In another case, Zhejiang Henglin Chair Industry has received 56 questions from the regulatory panel over its IPO application. The company is seeking the sell stock to the public at 56.8 yuan a share, the highest IPO price so far this year.


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