The China Securities Regulatory Commission (CSRC), often staffed by highly trained returnees from the US, is usually seen as squeaky clean. But the planned reforms suggest that all is not well with the 80-strong committe, set up by the CSRC, which makes the final decision as to which company lists.
On the heels of the completion in October of the two year tenure of the committee, proposed reforms include setting up a 'recommendation' system, whereby investment banks put forward the name of listing candidates. Their chances of doing more underwriting are determined by the performance of the companies they put forward. This will hopefully improve the lamentable performance of China's listed companies.
Other changes include reducing the number of the committee by two-thirds, and attracting a broader spread of talent from non-governmental and non-specialist sources.
Despite the disastrous performance of the Chinese stock market in the past 18 month, a listing is still a coveted achievement for Chinese companies.
The benefits are numerous, and they are not solely linked to the abuses which enable companies to raise a seemingly unending supply of capital. The capital, since dividends are rarely paid, is considered free, especially as ownership is so highly concentrated that even heavy secondary issuance barely dilutes the main stakeholder's ownership.
A listing also gives a company a media following and a ticket for large bank loans. Banks generally assume the level of disclosure of a listed company is better and that the company is less liable to renege on debt.
So companies have plenty of incentive to do their level best to influence the outcome of the adjudicating panel.
The panel was set up in October 1999 and is composed of senior staff from the financial world, such as the state banks, the CSRC, academics, securities industry and the accounting industry.
But critics point out that the workings of the panel do not seem to have helped either the profitability or the ethics of the listed companies, judging by the steady stream of scandals reported in China's aggressive financial media.
Indeed, one press report quotes, rather embarrassingly for the committee, that companies permitted to list since 2002 reported profits of just Rmb 0.1189 per share for the first half of 2003. This is 20% less than the Rmb 0.1459 per share of 541 listed companies selected for the study. Over the same period, operating cash flow per share was almost 60% less.
The most dangerous problem is perhaps the role of the 'public relations' company. In the broadest sense their role is to help a listing candidate communicate its message to the committee. But it is rumoured that these players, who operate in such a secretive fashion that their existence is not officially acknowledged, will prepare the way for large cash pay offs to influence the members of the working group.
The working group, some 8-10 person strong, is the target of the PR companies, not the whole committee. Their first task to guess who amongst the committee has been selected to judge their client company - theoretically not an easy task, since the working group is chosen in a random fashion from the wider committee. In addition, the members are strictly forbidden speak to the company which is being vetted.
The working groups were originally chosen on the basis of the expertise in the area in which the listing candidate was operating, but this made it too easy for the PR companies to guess who was going to be adjudicating.
Similarly, documents were originally sent out to the working group days in advance, but this also left a trail. Members only now know which companies they are vetting once they step foot in the CSRC building.
Once they have identified the members of the working group, they need to buy them out. Since all votes are won by a two/thirds majority, rather than by a unanimous decision as in other countries, the number they need to target is reduced.
Despite these measures, it seems the PR companies are highly resourceful, which means they have access to key personnel at the CSRC. One banker told journalists that the composition of the working group was changed on the very day of the hearing, but that they learnt the names of the new members just a few hours later.
Another complaint levelled against the organization is the randomness of its decisions concerning who lists.
Zhu Baoguo, the chairman of health products companies Shenzhen TaiTai says it is not realistic to believe the committee can make decisions in all areas.
"There is a limit to what they can legislate effectively on, but they go ahead anyway," he comments.
Others refer to the fact that many of the committee serve in the state sector.
But most important is the long-standing perception that small investors need to be protected. That leads to the bizarre situation where the committee will try to prevent companies from listing if they threaten to compete too fiercely with incumbents, since that could drive profits down and harm the small investors.