China's securities watchdog scares away IPO applicants

Only a day after China’s securities regulator announced it would closely vet the financial statements of listing hopefuls, companies started withdrawing their applications for new share sales.

The reaction has stirred speculation about how many companies that have already listed actually have “real, accurate and complete” documents, as required in the latest communication from officials.

Guizhou Zunyi Titanium, a titanium sponge producer, announced on Thursday that it would cancel its long-awaited initial public offering and has received confirmation from regulators on the withdrawal. Zunyi was the first company to scrap its IPO plans and more companies are expected to do the same.

China Securities Regulatory Commission (CSRC) is working to relieve an IPO backlog of 882 companies, as of January 4. Observers say the stringent new policies are designed to scare away IPO candidates with imperfect financial statements.

Deloitte said earlier this month that about 20% to 25% of current IPO applicants on the mainland may withdraw or re-consider their listings in 2013. If that estimate is correct, up to 220 companies will cancel A-share IPOs this year, lowering the waiting list to 662 firms — still a big number.

Zunyi, which is based in southwest China, first applied for an IPO in the A-share market in April 2008. Credit Suisse Founder Securities, the Swiss bank’s China partner, was appointed to manage the deal.

But the company has been making losses for the past three years and management preferred to avoid the scrutiny of a public listing to “save face”, people familiar with the matter said.

CSRC is launching 15 special working groups to randomly choose 20 to 50 companies from the IPO waiting list for the approval procedure, and it warned on Tuesday that any applicants whose submissions are not real, accurate and complete will face consequences.

The agency said that there were a total of 541 enterprises waiting for IPO approvals for the main board and 341 for the Nasdaq-style ChiNext board, as of January 4.

Last month, CSRC also relaxed rules for mainland companies seeking overseas listings to ease the backlog. It lowered the requirements on net income and net assets of companies applying to list overseas, but investment bankers said the policy was more of a gesture.

“The authorities want to encourage more companies to list overseas,” said a banker, “but the new policy is meaningless for smaller businesses — the costs of a Hong Kong IPO may outnumber the funds they’re aiming to raise.”

According to PricewaterhouseCoopers, China’s domestic stock markets had 155 IPOs last year, raising a total of Rmb108.3 billion ($17 billion). The accounting firm expect China’s A-share market to improve in 2013. It estimated there will be 200 new listings that could raise Rmb130 billion ($20.9 billion).