China is planning to name and shame the bankers responsible for withdrawn or rejected IPOs, as part of an ongoing effort to improve the quality of domestic IPOs.
The Securities Association of China last month consulted brokerages on proposals to add information on withdrawn or rejected A-share IPOs to its lists of so-called sponsor representatives, according to people who have seen the consultation paper. It also plans to add a new list of sponsor representatives who have received administrative punishments or were deemed unsuitable to carry out duties by the China Securities Regulatory Commission in the past three years.
Sponsor representatives are bankers who are authorised to sign IPO documents and are the intermediaries between companies seeking a listing and the authorities.
The SAC currently maintains three lists of sponsor representatives. These contain information such as names of bankers and their firms, how many IPOs they have sponsored, whether they have passed tests of professional ability and whether they have undergone administrative supervision by the CSRC in the past three years.
The new proposals have alarmed bankers, who have been facing increased scrutiny from regulators in recent years.
“To us, it’s a name-and-shame list. Sometimes issuers withdraw their IPO applications for different reasons and it’s not always the banks’ responsibility,” said a Beijing-based banker, who also questioned the timing of the move. “The industry is already struggling with deal volume slumping and deep cuts in bonuses and salaries.”
But some bankers agreed that the change, although not ideal, could have positive effects.
“I’m not surprised the SAC would want to do this. Some bankers’ work can be quite sloppy,” said another Beijing-based banker.
“Now that the information will be listed next to bankers’ names, they will probably be more careful in selecting clients to protect their reputation and reduce the chance of receiving a black mark.”
The SAC has not announced the consultation's outcome or when the new list will be published.
Written warning
A written warning issued by the Shenzhen Stock Exchange on August 9 to two IPO sponsor representatives, who led work on the Rmb545m (US$76m) ChiNext IPO of Bona Pharma, provides context to the SAC’s action. Two accountants who worked on the IPO also received the same written warning.
The Chinese pharmaceutical packaging company filed for the IPO via sponsor Citic Securities in June 2023 but withdrew the application in January.
In the written warning, SZSE criticised the poor due diligence work the bank did on LLC PTC Erecton, one of Bona's top five clients.
The bankers did not visit Erecton's warehouses in person, but only the company's offices and took pictures of the warehouses through CCTV footage. The bankers visited the warehouses and production lines of some of Erecton’s end-customers, but none of the photos showed any Bona products.
In addition, the sponsor also failed to flag an anomaly it uncovered during due diligence, according to the SZSE. The bankers visited the office of an Erecton-related company that claimed to be an international trading firm of pharmaceutical packaging materials. But the photos they took showed piles of shoe boxes stored in that office, raising doubts about the company’s actual business. Still, the bank undertook no further verification.
Joint liability
It's not just a case of public embarrassment for bankers associated with deals that go wrong. The Beijing Financial Court in June ruled that two sponsor representatives who worked on optical communication equipment maker Beijing Blue Mountains Technology’s public offering had to share 40% of the joint liability on the company’s false financial reporting.
This was the first case in which sponsor representatives were assigned joint liability. In previous cases only the sponsor firms were held liable.
Other parties that were ordered to share joint liability were China Dragon Securities, Tian Yuan Law Firm, Zhongxingcai Guanghua Certified Public Accountants and Kaiyuan Assets Appraisal. Blue Mountains has to bear full responsibility for compensation to investors.
Listed on the National Equities Exchange and Quotations in 2014, Blue Mountains applied in 2020 to move to a higher layer in the over-the-counter market in China. This was when the regulators discovered the company’s fraudulent financial reporting from 2017 to 2019. It was delisted in 2022.
Chinese regulators have repeatedly tried to ensure that only "high quality" companies can go public. In the past year, they have raised profit requirements for listing candidates and significantly increased on-site inspections of IPO applicants.
This came on top of restrictions put in place in August last year to reduce the pace of IPOs and follow-ons which have slowed issuance to a crawl.
Around 350 listing aspirants have terminated IPO applications so far this year.