Regulator vows to take hard look at IPO applicants

CSRC official says firms' materials must be 'real, accurate, complete'

China's top securities regulator announced on Wednesday that it will step up its review of the 2012 annual financial reports of companies seeking an initial public offering, focusing on risk disclosure and operational performance evaluation.

The examination process will include self-inspections by intermediaries such as securities companies and accounting firms, reviews by the China Securities Regulatory Commission, or the CSRC, and spot checks to expose fabricated deals and false business income, the commission said.

At Wednesday's close, the mainland benchmark stock index — the Shanghai Composite Index — retreated 0.03 percent to 2275.34. It sharply dropped 0.8 percent at 1:50 pm, but later recovered. On Dec 4, the index reached 1949.46, its lowest level since Oct 31, 2008.

"There will be no exceptions, and any violation will have consequences," CSRC Vice-Chairman Yao Gang said on Tuesday.

He said businesses that have applied for IPOs should make sure that the application materials are real, accurate and complete.

A sponsoring institution should withdraw its application if the enterprise's situation is not up to IPO standards, Yao said.

The self-examination reports should be submitted before March 31. The CSRC will launch 15 special working groups to randomly choose 20 to 50 businesses from the IPO waiting list for the spot-checking procedure, the commission said.

Some Chinese media called this series of examinations "the most stringent" in history.

"It will shake up the IPO-applying enterprises and the sponsor institutions," said a securities company manager who declined to be named. "Many enterprises are expected to get off the IPO waiting list."

As of Jan 4, a total of 541 enterprises applying for the main board and 341 for the Nasdaq-style ChiNext board are waiting for IPO approval. Analysts estimated that it may take another five years or more to see their debut.

By the end of 2012, the CSRC had terminated IPO examinations of 45 companies because of their substandard operational conditions and illegal operations.

Financial-fraud cases, in particular for the pre-listed companies, continue to be the problem in China, said Liu Xinhua, CSRC vice-chairman, at the annual accounting oversight meeting on Monday.

Development and reform of the capital market require improving the service level of accounting firms, including enhancing their business independence and upgrading project operational quality, Liu said. "It is also a precondition to strengthen investors' confidence."

Liu suggested that accounting firms focus more on a brand development strategy based on high-quality services rather than chasing expansion.

"The securities regulatory institutions will promote supervision and punishment on accounting agencies' illegal behaviors this year, especially for the auditing work on public companies," Liu said.

Problems of low accounting quality and information transparency have plagued Chinese listed companies, which hurt investors' interests and encourage speculative activities, analysts said.

In 2012, 154 enterprises launched IPOs in the mainland, a drop of 45.2 percent from a year earlier, because of the gloomy economic environment, according to ChinaVenture Group, a stock market research and consulting institute.

IPOs in the A-share market in 2012 raised 103.43 billion yuan ($16.42 billion) in total — 63.4 percent less than in 2011 — the lowest level in three years, it said.

Analysts said that stringent checks on the financial reports will push the companies to seek more financial channels besides listing on exchanges. The over-the-counter equity market is likely to be more attractive for the businesses, especially small and medium-sized companies.