Only 1 company submitted a listing application in 2 months!!

In April 2023, with the official listing of the first batch of 10 companies under the main board registration system, A-shares officially entered the era of the full registration system. At that time, some market participants pointed out that the registration system relaxed the conditions for enterprises to be listed, and the speed and number of new shares issued would increase significantly.

Now, nearly a year later, has the ecosystem of IPOs changed?

Let's start with a set of data. According to incomplete statistics from the IPO Daily, as of February 23, 47 companies have terminated their listing applications this year, of which 1 has been rejected and 46 have voluntarily withdrawn orders. In contrast to the termination of listings by companies, since the beginning of this year, only one company has submitted an application for A-share listing.

In other words, not only has the number of new shares not increased, but more and more IPO companies have chosen to retreat.

Recently, the news that the first IPO was still heavily fined for fraudulent issuance after the cancellation of the order has also aroused great concern in the market. Does this mean that IPO regulation will be stricter in the future?

Source: Tension

Only one company submitted a listing application

According to incomplete statistics from the IPO Daily, as of February 23, 47 companies have terminated their listing applications this year, of which 1 has been rejected and 46 have voluntarily withdrawn orders.

Among them, the company that will be rejected on the list is Zhejiang Shenghuabo Electric Appliance Co., Ltd. (hereinafter referred to as "Shenghuabo"), and the proposed listing plate is the main board of the Shanghai Stock Exchange.

According to the announcement, the listing review center of the Shanghai Stock Exchange paid attention to four issues in the inquiry, one is the effectiveness of corporate governance and internal control, the audit focuses on the impact of Shenghuabo's equity structure and relatives' tenure on the effectiveness of internal control, and the impact and rectification of various financial internal control irregularities during the reporting period. The second is customers and revenue, audit and focus on the customer composition of Shenghuabo, the matching relationship between revenue growth and downstream customer sales, and the verification of income authenticity. The third is related parties and related party transactions, and review and pay attention to the completeness of the disclosure of related parties and related party transactions, the reasons for related party transactions and the fairness. Fourth, accounts receivable and cash flow, audit and pay attention to the aging of accounts receivable, the collection of payments, and the reasons for the difference between net cash flow from operating activities and net profit.

The Listing Committee considered that, according to the application documents, Shenghuabo failed to show that the internal control system was sound and effectively implemented, and failed to fully explain that the financial statements fairly reflected the company's financial position, operating results and cash flow in all material respects, which did not comply with the relevant provisions of Article 11 of the Administrative Measures for the Registration of Initial Public Offerings.

In contrast to the termination of listings by companies, since the beginning of this year, only one company has submitted an application for A-share listing. Not only that, but the total amount of funds raised in the IPO was also significantly different from the same period last year. As of February 23, only 19 A-share companies have achieved IPO listings, raising a total of 17.449 billion yuan. From January to February 2023, 34 A-share companies will IPO listed companies, raising a total of 31.902 billion yuan.

These conditions are mainly affected by the tightening of IPOs.

On the evening of August 27, 2023, the website of the China Securities Regulatory Commission (CSRC) released the "Regulatory Arrangements for IPO and Refinancing in Coordinating the Primary and Secondary Markets".

With regard to the tightening of IPOs and refinancing, the China Securities Regulatory Commission (CSRC) has improved the counter-cyclical adjustment mechanism for the primary and secondary markets based on the current market situation, and has made six arrangements around reasonably grasping the rhythm of IPOs and refinancing. One of them is to tighten the pace of IPOs in stages according to the recent market conditions to promote the dynamic balance between investment and financing.

The "power" of tightening IPOs has already been demonstrated in 2023.

According to Choice statistics, in 2023, 313 companies in the A-share market will make initial IPOs, raising a total of 356.436 billion yuan. Compared with the whole year of 2022, the number of companies listed for the first time has decreased by 112, and the scale of fundraising funds has also decreased by 230.392 billion yuan, a year-on-year decrease of about 4%.

Strictly control the "entrance gate"

In addition to the impact of the above-mentioned arrangement, the sharp decline in the number of IPOs has also had a certain effect on the repeated emphasis of the regulatory authorities on cracking down on fraudulent issuances at the "entry gate".

Recently, the China Securities Regulatory Commission (CSRC) issued a document stating that it will resolutely crack down on illegal acts that seriously harm the interests of investors, such as fraudulent issuance, so that they will "go bankrupt and sit in prison"; implement the concept of "declaration is responsibility", "withdraw after investigation" and "walk away"; adhere to the full coverage of the crackdown, covering key links such as declaration, registration, and issuance, involving key sectors such as the main board, the science and technology innovation board, the growth enterprise board, and the Beijing Stock Exchange.

When it comes to fraudulent issuance, even if the IPO is cancelled, it must be investigated.

On February 9, the China Securities Regulatory Commission (CSRC) issued an administrative penalty for fraudulent issuance in the process of applying for the initial listing of the Science and Technology Innovation Board. This case is the first fraudulent issuance case investigated by the CSRC since the implementation of the new Securities Law, after the issuer submits the application materials but before it is registered.

Specifically, Silchip's IPO application was accepted in August 2021 and was destined for the Science and Technology Innovation Board. It entered the inquiry stage a month later, but finally submitted an application to withdraw its initial offering in July 2022, choosing to voluntarily terminate the IPO.

It is reported that since its establishment, Silchip has focused on the field of integrated circuit EDA, focusing on the front-end verification of digital chips, providing solutions such as prototype verification systems and verification cloud services for domestic and foreign customers.

According to the data of the prospectus, from 2018 to 2020 and the first quarter of 2021, the operating income of Silxin was 21.1944 million yuan, 71.7601 million yuan, 133 million yuan and 22.9146 million yuan respectively, and the net profit was -6.2179 million yuan, -9.8534 million yuan, 10.1072 million yuan and -3.4625 million yuan respectively.

But in reality, Silchip's data is false.

According to the administrative penalty issued by the China Securities Regulatory Commission, as a random inspection of the quality of initial information disclosure, the China Securities Regulatory Commission conducted an on-site inspection of Silxin in December 2021 and found that the company was suspected of inflating revenue and other violations of laws and regulations. After the withdrawal of Silchip, the CSRC conducted an investigation and trial on its suspected fraudulent issuance.

After investigation, Silxin fabricated material false content in the securities issuance documents announced, and there were false records in the financial data involved in Section 6 "Business and Technology" and Section 8 "Financial Accounting Information and Management Analysis" of the prospectus, with a total of 15.3672 million yuan of inflated operating income in 2020, accounting for 11.55% of the current year's operating income, and a total of 12.4617 million yuan of inflated profits, accounting for 118.48% of the total profit of the current year.

In this regard, the China Securities Regulatory Commission decided in accordance with the law: a total fine of 16.5 million yuan will be imposed on the relevant persons in charge such as Silxin and the chairman.

The responsibility of the "gatekeeper" is heavy

In addition, it has also been reported that the current severe punishment for listed companies is mainly aimed at the company itself, and the next intermediaries such as investment banks and accounting firms that provide packaging for them will also be subject to substantial heavy penalties in addition to the regulatory warning letter. At the same time, the exchange is currently checking the 10-year financial data of IPO companies, and some companies that have withdrawn their materials are also in the scope of the backcheck.

The authenticity of the above information has not yet been officially confirmed, but from the actual situation, the intermediaries who help enterprises to commit financial fraud are also guilty.

Recently, the official website of the China Securities Regulatory Commission published the first administrative penalty decision in 2024, mainly involving Ruihua Certified Public Accountants (hereinafter referred to as "Ruihua") and related responsible personnel. According to the CSRC, Kangdexin's annual reports from 2015 to 2017 contained false records such as inflating operating income and total profits. Ruihua was fined 17.83 million yuan for Kangdexin's financial fraud.

Specifically, Ruihua provided audit services for Kangdexin's annual financial statements from 2015 to 2017, and all issued standard unqualified audit reports, and Jiang Xiao, Qiu Zhiqiang, and Zheng Longxing were the signing certified public accountants of the relevant audit reports. The audit business income for each year was 1.9811 million yuan, and a total of 5.9434 million yuan was collected.

The SFC pointed out that Ruihua had breached the relevant practice standards and failed to exercise due diligence in its audit of Kangdexin's annual financial statements from 2015 to 2017. Although Ruihua and the responsible person put forward 9 reasons for defense, requesting exemption from administrative punishment, they were rejected one by one.

In this regard, the China Securities Regulatory Commission made the following decisions: 1. Order Ruihua Certified Public Accountants (Special General Partnership) to make corrections, confiscate 5.9434 million yuan of business income, and impose a fine of 11.8868 million yuan; 2. Give Jiang Xiao and Qiu Zhiqiang warnings and impose fines of 100,000 yuan respectively; 3. Give Zheng Longxing a warning and impose a fine of 60,000 yuan.

Looking back at the Kangde Xin financial fraud case, the incident was first exposed in mid-2019. At the same time, the China Securities Regulatory Commission ordered Kangdexin to make corrections, gave a warning, and imposed a fine of 600,000 yuan, imposed a fine of 900,000 yuan on Zhong Yu, the actual controller and directly responsible supervisor, and imposed a fine of 30,000-300,000 yuan on the rest of the relevant responsible persons.

Now, nearly five years have passed, and the China Securities Regulatory Commission has held intermediaries accountable, and the fines are not small, reflecting the regulator's severe crackdown on financial fraud.

From "acceptance is responsibility" to "declaration is responsibility", the advent of the comprehensive registration system has put forward higher requirements for the "gatekeeper" responsibility of intermediaries.

The "export customs" have gained a lot

While strictly controlling the "entry gate", in recent years, the regulator has also made changes in the "exit gate" and has gained a lot of gains.

In January 2024, Guo Ruiming, director of the Listing Department of the China Securities Regulatory Commission, publicly stated that in the past three years of reform, a total of 127 companies have been delisted, of which 104 have been forcibly delisted, and the number of mandatory delistings is nearly three times that of the previous 10 years of reform, showing two characteristics: first, the number of delistings at face value has increased significantly, and the number of delisted companies at face value last year was close to half of all delisted companies, and the self-regulation mechanism of survival of the fittest in the market has begun to take shape;

At the beginning of 2024, in less than two months, 3 listed companies have completed delisting, and 7 companies have locked in the fate of delisting, namely *ST Xinhai, *ST Potian, *ST Huayi, ST Hongda, *ST Eddie, *ST Oceanwide and *ST Bolong. Among them, *ST Poten and *ST Xinhai touched the situation of major illegal forced delisting, and the remaining 5 companies all touched the "face value delisting".

Compared with 2020, before the release of the new delisting rules, the number of delisted companies has increased significantly in recent years, but it is still far lower than the number of newly listed companies. Taking the whole year of 2023 as an example, a total of 313 companies in the A-share market have achieved IPO listings and 45 companies have been delisted, with a net increase of 268 listed companies during the year.

In addition, according to IPO Daily statistics, in 2023, the delisting rate of the A-share market will still be less than 1%, far lower than the 6% of the New York Stock Exchange and the 8% of the Nasdaq.

In response to the view that "the delisting rate of A-shares is not high", Guo Ruiming pointed out that the delisting of overseas markets represented by the United States is mainly privatization, absorption and merger by other listed companies, and voluntary delisting, and the voluntary delisting of some markets accounts for more than 90% of the total delisting, and the proportion of real forced delisting is not high. The delisting of these companies is a market-oriented choice made by their own corporate strategic considerations. There are many companies that are forced to delist from A-shares, but the cases of restructuring and delisting and voluntary delisting are significantly fewer than those in overseas markets.

Among the 45 A-share companies to be delisted in 2023, only 2 are voluntarily delisted, accounting for 4.44%, and these two companies are AVIC Electromechanical and Jingwei Textile Machinery. Among them, AVIC Electromechanical was absorbed and merged by AVIC, an A-share company, and Jingwei Textile Machinery was voluntarily delisted.

Specifically, there was no loss before the voluntary delisting of warp and weft textile machinery, and there was no punishment or investigation due to financial fraud and information disclosure violations and violations, and the stock price was about 9 yuan before the announcement of the delisting. From 2020 to 2022, the operating income of warp and weft textile machinery will be 9.015 billion yuan, 12.409 billion yuan and 11.887 billion yuan respectively, the net profit will be 410 million yuan, 601 million yuan and 454 million yuan respectively, and the non-net profit will be 215 million yuan, 611 million yuan and 335 million yuan respectively.

In order to protect the interests of small and medium-sized shareholders, in accordance with the provisions of relevant laws, regulations and normative documents such as the Shenzhen Stock Exchange Stock Listing Rules (Revised in 2023), the company's shareholders China Hengtian Group Co., Ltd. China Hengtian Holdings Co., Ltd. proposed that the company voluntarily withdraw the listing and trading of A-shares on the Shenzhen Stock Exchange by resolution of the general meeting of shareholders, and instead apply for transfer in the national small and medium-sized enterprise share transfer system. ”

Where is delisting headed?

At the export customs, the China Securities Regulatory Commission said that it will continue to consolidate and deepen the normalized delisting mechanism. First, we will continue to unblock diversified exit channels, support the effective integration of resources through absorption and merger, and promote the improvement of the bankruptcy reorganization system. The second is to strictly implement the rules of delisting, adhere to the principle of "retreating as much as possible", and severely crack down on malicious "shell" behaviors such as financial fraud and market manipulation associated with the delisting process, so as to maintain the seriousness of the delisting system. The third is to resolutely prevent "retreating". If the company and related parties violate laws and regulations, they must be resolutely held accountable even if they are delisted.

So, what room for improvement is there in terms of delisting? How can Big A better become a market that "has entry and exit, and can form a liquidity"?

An industry insider believes that in the current four situations of mandatory delisting, there is still room for optimization of financial delisting indicators.

In 2020, the new delisting regulations optimized the financial indicators, canceled the indicators of a single negative net profit and operating income less than 10 million yuan, and added a combined delisting indicator of "the lower net profit before and after deduction is negative and the operating income is less than 100 million yuan", which conducts a multi-dimensional investigation of the listed company's ability to continue operating from the aspects of profitability and revenue scale, and compresses the operating space that has lost the ability to continue operating and relies on non-recurring profits and losses to avoid delisting.

But it also means that even companies that have been losing money for years may be able to retain their listing status.

The industry insider suggested retaining the situation of terminating the listing after losing money for many consecutive years, or increasing the delisting rules related to cash flow indicators such as operating cash flow.

As for the higher number of companies voluntarily delisting in the United States, a senior private equity practitioner told IPO Daily that this is because of the higher cost of U.S. companies to remain listed. After the Enron and WorldCom financial fraud scandals, the United States strengthened the supervision of listed companies and introduced a number of bills, which greatly increased the compliance requirements for companies to go public, increased the cost of listing companies and the legal risks of senior executives, and also increased the disclosure costs of company listings.

In addition, the development of private equity financing in the United States has provided more abundant financing channels for start-ups. In contrast, domestic small and medium-sized enterprises are difficult and expensive to obtain financing, while enterprises with a little strength tend to raise funds through public offerings of new shares.

The private equity source pointed out that to increase the willingness of A-share companies to take the initiative to delist, it is necessary to increase the cost of maintaining listing, and strengthen the supervision of corporate information disclosure, especially "junk stocks" and "shell companies". When the benefits of maintaining its listing are far less than the various costs it needs to pay, it will naturally take the initiative to delist. In addition, the regulatory authorities should also provide clear rules and plans for voluntary delisting, and form an overall rule system for voluntary delisting and mandatory delisting.