Punchy CSRC sets sights on IPO sponsors

Chinese regulator gets aggressive under new boss.

China’s securities regulator, emboldened under its tough new leader, is clamping down on IPO sponsors in the country. That might ruffle a few feathers — but local market participants think it is necessary.

Investors have 21 less IPOs to expect in China’s A-share market. That was the number of deals put on hold by the China Securities Regulatory Commission (CSRC), after it launched a probe into a securities house that had sponsored the mooted listings.

Zhongtai Securities, a Shandong-based securities firm in China, disclosed on September 2 that the CSRC had built a formal case against the company for allegedly breaking “relevant securities and futures regulations”.  It was not immediately clear which rule the regulator alleges has been broken.

The aggressive move to clamp down on a local securities house is not unusual for the regulator. Industrial Securities, Southwest Securities and Zhong De Securities have all fallen victim to similar probes this year.

The man who gets much of the credit for the clampdown is Liu Shiyu, a career banker who is proving a strict taskmaster for the local market.

Tough act to follow

Liu, the former chairman of Agricultural Bank of China, has spent most of his career working at China’s central bank. He took the CSRC job from Xiao Gang, a proactive chairman who had come under fire for the rout in China’s stock market last summer — and the cack-handed response from the government.

Liu has started strong, punishing securities houses for infractions, and in the process reducing a supply glut that could damage stock prices.

This is not official government policy. Despite rumours that the government wants to reduce the overhang of IPOs by a third, there has been no official paper on this, said a lawyer in the country. But it is — at the very least — a biproduct of Liu’s tough style of management.

Whenever the securities regulator is investigating a firm, it will not accept or process any listing applications of companies backed by a vetted sponsor.

Although there has been a general tightening of scrutiny on the industry since last summer’s stock rout, the watchdog’s scope has expanded to a wider clean-up on equity market shenanigans. It is no longer just going after brokerages that offer derivatives financing for stock trading, or those that offer short selling, according to several people FinanceAsia talked to.

“The oversight got tougher after the new CSRC chairman took office,” said a Beijing-based investment banker at a Chinese securities house. He gave the example of IPO requirements: much more stringent now than they were in the past.

The country’s stock markets are slowly recovering from a rout in prices that extended until the start of the year. The regulator is trying its best to ensure that any new deals that come to the market are not going to come back to haunt investors.

Liu Shiyu [Source: CSRC]

The CSRC on June 24 said on its official website that it had kicked off a series of vetting activities of IPO deals in the country, in areas such as false or incomplete information disclosure.

“It’s a welcome process,” said Benjamin Kroymann, a partner at law firm Squire Patton Boggs, referring to the clean-up of malpractices in the IPO market. The crackdown “has to be done, and has [been needed] for a while,” he added, as stocks markets need “more compliant” securities firms and IPO applicants.

But the costs of such a wide scope of scrutiny are quite “high”, Kroymann added, for both China’s equity capital market and the companies lining up for their listing approvals.

There has already been an impact on deal flow. The number of IPOs, and the amount of money raised, in China’s A-share market dropped significantly during the first half of 2016, compared to the same period last year, according to PwC.  

Only 61 A-share IPOs were completed during this period, down 67%. But the fall is even more dramatic when considering the size of deals: new listings raised Rmb28.8 ($4.32 billion), a whopping 80% lower than the same period last year.

The final clampdown

There were 894 companies on the CSRC’s waiting list on June 30, according official data. Under current rules, a company can only list after obtaining an approval from the regulator — and it does not appear in a giving mood.

Brokers have been briefed by the CSRC to restrain the amount of IPO clients, or even cut down their list of applicants, said Kroymann. And the watchdog allowed IPOs to resume in November after a four-month break, approvals have remained subdued.

“The speed of [IPO approval] is really dependent on how eager the regulator is willing to let companies go public,” Hong Hao, chief strategist at Bocom International in Hong Kong, told FinanceAsia. But now “they are pacing it”, he added.

That appears to be the right strategy. Allowing a large amount of new deals at the same time could depress the markets, said Hong. That is Liu Shiyu’s concern.

It is one he has been addressing willingly — and with a firm hand.

 

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