Investment bankers upset new Chinese IPO rules will force them to be honest

Well, if this doesn’t take the cake.

Some Chinese investment bankers are saying if they can’t rip-off investors by presenting false or misleading information on initial public offerings then this will have a chilling effect on underwriters.

Well, if the chilling effect prevents them from selling crap than let’s hope it does.

police billy cluvbBankers and lawyers told Reuters that newly approved Chinese rules for IPOs that allow investors to immediately seek compensation if they suffer losses due to false or misleading information in the listing material will have hurt underwriters because potential liabilities are hard to quantify. They said the new rule throws into question whether the money they receive from underwriting IPOs will be worth the risks involved.

“Taking it at face value, there are some serious concerns,” an investment banker who declined to be identified, as he was not authorized to discuss regulatory issues, told Reuters.  “If this is indeed what the regulators are intending to do, it’ll change the risk-reward analysis for doing any sort of underwriting in China. It would also make China very different from any other jurisdictions.”

Oh Jeez. Cry us a river. Asia Unhedged is breaking out the violins. Yeah, it’s going to be a real drag for you to run an honest operation.

The new tough rules will force banks to boost vetting standards, which should help ease concerns about poor corporate governance at Chinese companies after a series of accounting scandals in past years. Previously, disgruntled investors could only file claims for a botched IPO after China’s securities regulator had taken action against the banks sponsoring the share offerings, issuers or other intermediaries involved, according to Reuters.

The rules, which went into effect on Jan. 1, comes as China moving from an approval-based system to a US-style registration process and gets ready to allow market forces to play a greater role in IPOs.

The new rules shift the responsibility for vetting IPO candidates to the banks, but don’t clarify how much the banks would be liable for and how much evidence would be necessary before a sponsor would have to make a payment, sources told Reuters.

“This is part of Xi Jinping’s effort to combat bribery and market deficiency,” said a person at a Chinese broker who was not authorized to speak publicly on the matter. “It will increase the costs of doing business among all sponsors and eventually they will be more careful in performing their due diligence, which in the long run is good for all market participants.”

Asia Unhedged doesn’t understand why this is a bad thing.

Reuters reports that the China Securities Regulatory Commission has penalized brokers such as Ping An Securities and Everbright Securities for shoddy work in the past, Ping An was fined 51.1 million yuan ($7.8 million) for its work on Wanfu Biotechnology (Hunan) Agricultural Development’s IPO, and had its sponsorship license suspended for three months. It was also forced to set up a voluntary 300 million yuan fund to compensate investors. Wanfu was later convicted of securities fraud.



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