CSRC strikes at IPO abuse

Chinese securities authorities declared late last week that they will punish a group of companies and their listing sponsors for fraud and negligence during failed efforts to go public.

The China Securities Regulatory Commission (CSRC) announced Friday on its official website that it will fine Minsheng Securities 2 million yuan ($325,800) for falling short of due diligence requirements when it supported Shanxi Tianneng Technology's initial public offering (IPO) bid in 2011. The commission also said it will seize the 1 million yuan commission fee collected by Minsheng Securities for its involvement in the aborted float.

Meanwhile, the CSRC also handed down a warning to Nanjing Securities for similar due diligence shortcomings when it backed Guangdong Xindadi Biotechnology's IPO in 2012.

Both listings were eventually withdrawn from regulatory consideration after media reports called into question the authenticity of financial disclosures from the IPO candidates.

The securities watchdog went on to say Friday that it will require the two brokerages to rectify their internal management systems within six months. The individual representatives behind each of these sponsorship deals will also be "banned for life from entering the stock market."

The CSRC did not elaborate on the nature of this ban or say when these punishments will take effect, although the commission did remark that the illegal actions conducted by these brokerages would impact their plans to offer new services, open new branches and raise funding.

But the sting of the CSRC's latest whipping will be felt by more than just the two underwriters. Both Tianneng and Xindadi, which allegedly inflated their profits by 38.15 million yuan and 26.28 million yuan respectively in their IPO paperwork, will be subject to financial forfeit. Specifically, Tianneng and Xindadi and their representatives will be fined 2.8 million yuan and 3.3 million yuan, marking the first time such penalties have ever been dispensed by the CSRC to non-listed firms.

As Li Bo, an analyst from GF Securities, explained to the Global Times, the fact that these enterprises and their underwriters are being penalized even though their IPOs failed to launch is a sign that the CSRC is losing patience with rule-breakers.

"Even if investors aren't hurt, companies and their sponsors can still be punished for trying to defraud the market - this is the message that I think the regulator wants to send here," said Li, who went on to speculate that, "we can imagine severe punishments will come in the future when the interests of investors are actually compromised."

Last month, the CSRC proclaimed that it would suspend Ping An Securities' underwriting license for three months for its role ushering Wanfu Biotechnology onto the A-share market in 2011. The commission announced Friday as well that it will be investigating Shanghai-listed Sinovel Wind Group Co, which admitted in April to fraudulently adding 929 million yuan in revenue and 177 million in profits to its 2011 earnings report.