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Is CSRC ready to sharpen scrutiny?
April 19, 2011, Tuesday
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THERE'S a bad odor wafting through China's market regulatory framework.
The China Securities Regulatory Commission announced earlier this month that it was revoking its approval for the initial public offering of Shengjingshanhe Bio-Technology Co and ordering the firm and its underwriter Ping An Securities Co to return 582 million yuan (US$89.13 million) raised from investors.
Well, that seemed like the regulator was doing its job until investors scratched the surface.
It was the second time the Hunan-based liquor maker had its IPO shelved amid media reports that there was something fishy with its finances ahead of a listing on ChiNext, China's Nasdaq-style board, in Shenzhen.
Media reports last year said products made by Shengjingshanhe weren't sold in major market regions as the company had claimed. That revelation, in turn, led to questions about prospectus claims that the company earned 29.64 million yuan in profit and 160 million yuan in revenue for 2009.
The reports prompted the CSRC to call off Shengjingshanhe's IPO on December 16, the eve of its scheduled listing.
A big celebration party planned by the company for December 17 was scrapped, and teams from Ping An and auditing firms hired by Shengjingshanhe went in to "recheck" the firm's business records.
Their conclusion: Shengjingshanhe had not run afoul of CSRC listing standards although the company admitted that reporting of some client information had been inadvertently neglected due to what it called different ways of calculating figures.
This "unintended" negligence was cited by CSRC as the main reason why it shelved Shengjingshanhe's IPO a second time. That seems to suggest that the IPO may go ahead if all the "forgotten" bits are reported next time around.
But questions remain.
Why did the brokerage firm and auditors all fail to find this "small negligence" in the first place? Why did Shengjingshanhe forget to report the information? Is the joint report by Ping An and auditors trustworthy when they are all on the company's payroll?
It's pretty certain that Ping An and the auditors didn't reveal what kinds of companies were doing business with Shengjingshanhe when they cleared the company for an IPO last year.
More importantly, is just canceling an IPO and returning money to investors a serious enough reprimand to demonstrate the regulators' determination to root out dodgy dealings?
Neither Shengjingshanhe nor Ping An was fined or otherwise punished by the CSRC for their "accidental negligence."
This gives the impression that such behavior is okay if you don't get caught.
Even a fine might not be much of a deterrence, given the hundreds of millions or even billions of yuan a company and its underwriters stand to make if deception is never discovered.
It's a sad day for market reform if scrutiny rests with the media. Had it not been for astute news reporting, Shengjingshanhe officials would have been raising their toasts to their listing success.
If Shanghai indeed wants to become a global financial center on par with London by 2020, it's going to have to do better than that. Market regulation is not a job for journalists. It's a job to be carefully and thoroughly done by professionals in the securities industry.
Some analysts have argued that vetting all listed companies and IPO candidates is a job too massive for regulators because of the sheer volume of business.
That argument claims that regulators need to rely on information provided by brokerages or underwriters, who should shoulder part of the responsibility for scrutinizing IPO candidates.
But isn't that putting the cat among the pigeons?
Yes, scrutiny is tough work, especially when you consider China's plans to expand its stock markets. ChiNext alone is expected to see a 10-fold increase in the number of companies seeking to list by 2015. The ambitious five-year blueprint aims to draw an average of 300 new firms annually to the stock markets, which include two main boards, the Small and Medium Enterprise Board and the ChiNext board for high-growth start-ups.
What the CSRC needs most, I think, is not more help but more training in ethics awareness. It needs to operate in an atmosphere where influence is not for sale.
Century Weekly magazine, citing anonymous sources, said local governments negotiated with the Hunan provincial securities regulatory commission on behalf of Shengjingshanhe and Ping An Securities to "coordinate" the IPO deal after its first rejection.
Local government authorities, too, have vested interests. An IPO of a local company is considered a feather in their caps that can boost public stature and help attract more investment, the magazine said.
Local government authorities, too, have vested interests. An IPO of a local company is considered a feather in their caps that can boost public stature and help attract more investment, the magazine said.
If these shenanigans are true, it might explain why Shengjingshanhe's second listing effort was rejected with such minor failings cited, and no punitive damages were assessed against the company or its underwriters.
Maybe that's why Yao Sheng, board chairman of Shengjingshanhe, confidently told reporters right after the second failure on April 6 that his firm will again try for a listing in 2012.
Any further discovery of deceit in the Shengjingshanhe case will leave Ping An with even more egg on its face.
So is the CSRC ready to sharpen its scrutiny? Or maybe I should ask if journalists are ready to sharpen theirs?
The China Securities Regulatory Commission announced earlier this month that it was revoking its approval for the initial public offering of Shengjingshanhe Bio-Technology Co and ordering the firm and its underwriter Ping An Securities Co to return 582 million yuan (US$89.13 million) raised from investors.
Well, that seemed like the regulator was doing its job until investors scratched the surface.
It was the second time the Hunan-based liquor maker had its IPO shelved amid media reports that there was something fishy with its finances ahead of a listing on ChiNext, China's Nasdaq-style board, in Shenzhen.
Media reports last year said products made by Shengjingshanhe weren't sold in major market regions as the company had claimed. That revelation, in turn, led to questions about prospectus claims that the company earned 29.64 million yuan in profit and 160 million yuan in revenue for 2009.
The reports prompted the CSRC to call off Shengjingshanhe's IPO on December 16, the eve of its scheduled listing.
A big celebration party planned by the company for December 17 was scrapped, and teams from Ping An and auditing firms hired by Shengjingshanhe went in to "recheck" the firm's business records.
Their conclusion: Shengjingshanhe had not run afoul of CSRC listing standards although the company admitted that reporting of some client information had been inadvertently neglected due to what it called different ways of calculating figures.
This "unintended" negligence was cited by CSRC as the main reason why it shelved Shengjingshanhe's IPO a second time. That seems to suggest that the IPO may go ahead if all the "forgotten" bits are reported next time around.
But questions remain.
Why did the brokerage firm and auditors all fail to find this "small negligence" in the first place? Why did Shengjingshanhe forget to report the information? Is the joint report by Ping An and auditors trustworthy when they are all on the company's payroll?
It's pretty certain that Ping An and the auditors didn't reveal what kinds of companies were doing business with Shengjingshanhe when they cleared the company for an IPO last year.
More importantly, is just canceling an IPO and returning money to investors a serious enough reprimand to demonstrate the regulators' determination to root out dodgy dealings?
Neither Shengjingshanhe nor Ping An was fined or otherwise punished by the CSRC for their "accidental negligence."
This gives the impression that such behavior is okay if you don't get caught.
Even a fine might not be much of a deterrence, given the hundreds of millions or even billions of yuan a company and its underwriters stand to make if deception is never discovered.
It's a sad day for market reform if scrutiny rests with the media. Had it not been for astute news reporting, Shengjingshanhe officials would have been raising their toasts to their listing success.
If Shanghai indeed wants to become a global financial center on par with London by 2020, it's going to have to do better than that. Market regulation is not a job for journalists. It's a job to be carefully and thoroughly done by professionals in the securities industry.
Some analysts have argued that vetting all listed companies and IPO candidates is a job too massive for regulators because of the sheer volume of business.
That argument claims that regulators need to rely on information provided by brokerages or underwriters, who should shoulder part of the responsibility for scrutinizing IPO candidates.
But isn't that putting the cat among the pigeons?
Yes, scrutiny is tough work, especially when you consider China's plans to expand its stock markets. ChiNext alone is expected to see a 10-fold increase in the number of companies seeking to list by 2015. The ambitious five-year blueprint aims to draw an average of 300 new firms annually to the stock markets, which include two main boards, the Small and Medium Enterprise Board and the ChiNext board for high-growth start-ups.
What the CSRC needs most, I think, is not more help but more training in ethics awareness. It needs to operate in an atmosphere where influence is not for sale.
Century Weekly magazine, citing anonymous sources, said local governments negotiated with the Hunan provincial securities regulatory commission on behalf of Shengjingshanhe and Ping An Securities to "coordinate" the IPO deal after its first rejection.
Local government authorities, too, have vested interests. An IPO of a local company is considered a feather in their caps that can boost public stature and help attract more investment, the magazine said.
Local government authorities, too, have vested interests. An IPO of a local company is considered a feather in their caps that can boost public stature and help attract more investment, the magazine said.
If these shenanigans are true, it might explain why Shengjingshanhe's second listing effort was rejected with such minor failings cited, and no punitive damages were assessed against the company or its underwriters.
Maybe that's why Yao Sheng, board chairman of Shengjingshanhe, confidently told reporters right after the second failure on April 6 that his firm will again try for a listing in 2012.
Any further discovery of deceit in the Shengjingshanhe case will leave Ping An with even more egg on its face.
So is the CSRC ready to sharpen its scrutiny? Or maybe I should ask if journalists are ready to sharpen theirs?
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