Banking & Finance

Talking tough

Investors bet on the CSRC’s resolve to delist fraudulent firm

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Also punished: Industrial Securities

The introduction of delisting rules often creates consternation in stock markets. In the turbulence that follows, sometimes even the regulators pay the price.

In 2002 Hong Kong’s stock exchange, the HKEx, proposed to delist so-called ‘penny stocks’, or listed firms whose share price had traded for 30 consecutive sessions below 50 Hong Kong cents. The planned changes triggered a major sell-off in those penny stocks but also saw the broader market slump as well. Shocked by investor anger, regulators backed away from the suggested change and the stock exchange’s chief executive Kwong Ki-chi subsequently resigned.

Fast forward to present day China, and the country’s stock market watchdog says it is also determined to enforce a delisting mechanism of its own. Similar to HKEx and the penny stocks, the China Securities Regulatory Commission (CSRC) says it is acting to protect the interests of retail investors.

In June it annnounced that it had decided to boot Xintai Electric off the Shenzhen bourse after a preliminary probe found it guilty of fraud. At the time of the CSRC announcement no one seemed to take it too seriously, reckons Caixin Weekly, given that the delisting mechanism was first introduced in 2014 but had not been implemented since.

A month later the CSRC made plain that Xintai’s delisting was not an empty threat.

In a press conference, the regulator said that it had fined and reprimanded 17 current and former executives of Xintai for forging financial data in the lead-up to its IPO in 2014. The sponsor of the electrical equipment maker’s listing was also penalised, with the Shenzhen Daily reporting that CSRC bosses were ordering Industrial Securities to set aside Rmb550 million ($82 million) to meet potential losses among retail investors who bought into Xintai’s IPO.

That is one of the most severe penalties yet for a case of IPO fraud in China. Its only rival is a case from 2012, when Wanfu Biotechnology inflated its pre-IPO profits by 90%. The fraud saw the company chairman sentenced to three years in prison and Wanfu’s IPO sponsor, Ping An Securities, was fined Rmb76 million.

Xintai’s chairman Wen Deyi has admitted fabricating financial information in the more recent case, but says that the violation does not warrant delisting. The company now seems headed for bankruptcy (likewise Wen could face time in jail).

In fact, media interest in Xintai has led to the newspapers uncovering a couple of similar cases. For instance, China Daily says the investment firm Zhuhai Boyuan was delisted earlier this year from the Shanghai bourse for breaking disclosure rules.

However, the investing public didn’t look to be hugely convinced of the regulator’s resolve in Xintai’s case.

Instead of shunning the stock last week, speculators piled into it, pushing the share price up by its daily limit. In its final trading session, up to Rmb57 million worth of Xintai shares changed hands. This frenetic reaction followed 50 regulatory statements posted by Xintai since July warning of the delisting risk.

So why the interest in buying the shares? Shenzhen Daily reckons investors were betting that regulators would allow Xintai to continue trading. And in fact, the punters were partly right. The CSRC is now in the process of transferring Xintai’s A-shares from Shenzhen to the less liquid (and more speculative) New Third Board in Beijing. This decision to move it to the over-the-counter bourse – rather than see it disappear from exchanges completely – may be designed to help salvage some of its assets before it goes into liquidation.

Of course, Shenzhen’s bolder retail investors love to bet on volatile shares. So perhaps they will soon be trying their luck with Hong Kong’s penny stocks – an avenue that will start to open to them once the Shenzhen-Hong Kong Stock Connect goes live. The scheme will likely launch in mid-November, it was announced this week (see WiC337).

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