Scandal adds red tape to China IPOs

An IPO scandal has pressured China regulators to tighten rules on IPOs, pushing PE and VC to consider other exit strategies.

The China Securities Regulatory Commission (CSRC) has tightened public listing requirements in the aftermath of a scandal involving a fake IPO, according to Yansong Wang, managing director of China First Capital.

Earlier this year, a Guangdong company called Xindadi, a producer of tea and oil, applied for an IPO and was approved by the CSRC after due diligence. Local media eventually exposed the company as a sophisticated fraud. Every one of its statistics had been made up, according to Yansong Wang, the managing director of China First Capital.

The official Chinese media have not reported on the incident, but social media and news site claim that both government regulators and investors were fooled by the group’s headline story and strong financials.

“[The CSRC] really lost face,” Wang told PE Asia. Hence, the CSRC has been checking every IPO application thoroughly, as they don’t want to risk another bad IPO going to market.

Consequently, the IPO market in China has a rather large backlog – the investigation process of a company can now take up to three months, and the waiting list for IPOs is 100 companies in Shanghai and 300 in Shenzhen, according to Wang.

Chairman and chief executive of China First Capital Peter Furhman told PE Asia that this domestic scandal is “crucial to understanding what’s wrong with China’s IPO markets” right now.

A China First Capital report estimates the average number of IPOs in China as low at 250 a year on average, but Wang predicts that it will be even less this year. She believes that private equity investors will need to start thinking of other exit options such as mergers and acquisitions.

By comparison, in Hong Kong, the world's leading stock exchange for IPOs by valuation last year, there were 82 active listing applications at the end of August, according to an HKEx spokeswoman. The due diligence process for listing usually takes 10-12 weeks, she added.