CSRC may sideline first underwriter

The China Securities Regulatory Commission (CSRC) will suspend the listing sponsorship qualifications of an investment bank headquartered in Shenzhen for failing to ensure the accuracy of financial statements from a company it backed for a public float, the China Securities Journal (CSJ) reported Wednesday, citing insiders close to the matter.

If the paper's sources are correct, the CSRC could be on the verge of dispensing its harshest punishment yet on a listing sponsor accused of vouching for misleading or inaccurate financial paperwork, according to the CSJ.

The paper did not mention which bank was under the commission's crosshairs, although experts contacted by the Global Times identified Shenzhen-based Guosen Securities as the institution most likely being referenced.

Guosen Securities had been issued a warning earlier this year for reportedly failing to spot inflated earnings figures in the listing prospectus of Xi'an LONGi Silicon Materials Corp, a company it helped launch onto the Shanghai stock market in April 2012. Guosen currently has 57 clients queued up for public share offerings, Chinese media wrote last Thursday.

Under regulations put forward by securities authorities in June 2009, listings underwriters who neglect to point out fraud in an IPO candidate's listing paperwork could have their sponsorship privileges revoked for anywhere between three months to one year.

The CSRC has primarily stuck to levying financial penalties on listing sponsors who guarantee fraudulent documentation, Cai Junyi, chief investment consultant from Shanghai Securities, told the Global Times. The commission has relied on milder punishments amid concerns that suspensions would be unfair to more scrupulous IPO candidates who might be forced to idle their listing plans due to the misdeeds of their sponsors, Cai went on to say.

"The commission's fines usually only come to a few thousand yuan though, if it takes any action at all," Cai said.

But given the vital role they are charged with in the IPO process, listing sponsors generally bring in several billion yuan in profits for every firm they help go public, Qian Qimin, deputy head of market research at Shenyin & Wanguo Securities, told the Global Times.

Considering how much underwriters can benefit by looking the other way on inflated records, as well as the light consequences of being caught, fraud is common among companies in line to list, Qian explained.