Regulations to clean up IPOs

CSRC targets fake documents, fudged financials, suspect companies

Tightened approvals for initial public offering or IPO applications will help boost market trust and improve the quality of new stocks, analysts said.

In October, the China Securities Regulatory Commission constituted a new IPO application review committee. Since then, it approved 44 IPO applications and rejected 24 as of Dec 10.

The new approval rate of about 60 percent is substantially lower than the 80 percent of the first 10 months of this year, according to official data.

The regulator will need to strike a fine balance between nurturing a healthy market and protecting investor interest, while maintaining a market-oriented approach to meet companies' financial needs, analysts said.

A research note from Shanghai Chongyang Investment Co, an asset manager, said the regulatory focus is not just limited to review of the profitability of companies but takes into account other important factors like the authenticity of financial statements, the rationale for fund-raising, investment plans, corporate governance and risk control.

Tighter regulation will help prevent companies that cook their financial books and engage in fraud from entering the market, which, in turn, will better protect the interests of investors, the firm said in its note.

Gai Binhe, an analyst at Huajin Securities Co Ltd, said stricter regulation and stiffer qualifying standards will likely mark the IPO approval process from now on.

"But the regulator may face greater pressure to maintain a reasonable supply of new shares while ensuring the quality of the IPOs given that there has been a long queue of companies seeking to float shares in the public market," Gai said.

The IPO review committee under the CSRC has the ultimate say in deciding whether a company is qualified to go public in China.

But the country's review-based IPO approval system has been criticized by investors for giving reviewers too much power, while suppressing the function of the market.

In an infamous incident, Feng Xiaoshu, a former member of the review committee, bought a large amount of shares in a company, using the names of his relatives, ahead of an IPO and sold them for an illegal profit of 248 million yuan ($37.58 million).

To put a check on the powers of reviewers, the CSRC has set up a committee to evaluate and approve applications for IPOs, refinancing, and mergers and acquisitions.

"No forbidden zones, full coverage, zero tolerance and life-long accountability" will be the guiding principle of the supervision committee, Liu Shiyu, chairman of the CSRC, said.

Abnormal financial conditions, inability to generate sustainable profits and questionable authenticity of application documents were among the reasons for the recent rejections.

The IPO application of Tap4fun, a Chengdu-based mobile game company, was rejected as it was found it had run its mobile game and telecom value-added businesses without the necessary permissions, which raised doubts about its profits.

Observers said that the success of an IPO approval will increasingly depend on authenticity, not profitability. Companies lacking internal strength won't be able to ride luck alone toward approvals for their IPO plans.

The regulator has vowed to strengthen IPO regulation and keep a close eye on the practice of faking documents and dressing up company's financial figures.

"We aim to build a review team with loyalty, integrity and unity. Strict rules will be applied to prevent significant IPO review risks to protect interests of ... small investors," said Gao Li, a CSRC spokeswoman.

Xinhua contributed to this story.