What does it mean that CITIC Securities was supervised on the spot?

Zhongxin Jingwei, March 23 (Zhou Yihang, Xue Yufei) Due to the lack of clarity in the content of the reply letter to Liangang Optoelectronics and its sponsor CITIC Securities, and the problems involved, the Shenzhen Stock Exchange announced on the evening of the 22nd that it decided to start on-site supervision of CITIC Securities.

The road to listing of Liangang Optoelectronics can be described as twists and turns, and the Shenzhen Stock Exchange has issued letters of inquiry to it three times. Industry insiders pointed out that on-site supervision means that the exchange has doubts about the performance of CITIC Securities in the Liangang Optoelectronics sponsored project, and needs to further verify the situation through on-site verification to evaluate the practice quality and risk control ability of CITIC Securities in the sponsored project.

Since 2024, 78 projects have been voluntarily withdrawn by sponsors, of which 7 are CITIC Securities. On the 23rd, Zhongxin Jingwei contacted CITIC Securities through the email address provided by the customer service staff of the CITIC Securities investor hotline, but did not receive a response as of press time.

What is on-site supervision and what are the specific measures?

According to the Business Guidelines for the Review of Stock Issuance and Listing on the Shenzhen Stock Exchange No. 4 - On-site Supervision of Sponsor Business, on-site supervision refers to the conduct of on-site supervision, verification and guidance on the practice quality of the sponsor and relevant securities service institutions of the enterprise that applies for an initial public offering of shares or depositary receipts and is listed on the Shenzhen Stock Exchange as needed.

The implementation of on-site supervision may take the following supervision methods as needed: (1) on-site inquiry, (2) reading, copying, recording, and extracting sponsor working papers and relevant working papers of securities service institutions, (3) checking relevant evidence materials, (4) interviewing relevant objects, (5) requiring sponsors and securities service institutions to supplement verification, and (6) other methods that the supervision group deems necessary.

Zhao Xijun, co-dean of the China Capital Market Research Institute of Chinese University, told Zhongxin Jingwei that in accordance with the requirements of the registration system, the stock exchange will organize a team of experts to review the initial public offering materials submitted by securities companies and companies to be listed. If the brokerage sponsor fails to fulfill its duty of diligence, the exchange has the responsibility to supervise it by taking measures such as on-site supervision.

According to Tian Lihui, dean of the Financial Development Research Institute of Nankai University, the exchange's "on-site supervision" of CITIC Securities means that the regulator has doubts about the performance of CITIC Securities in the Liangang Optoelectronics sponsorship project, and needs to further verify the situation through on-site verification to assess the practice quality and risk control ability of CITIC Securities in the sponsored project.

"For CITIC Securities, on-site supervision means that CITIC Securities needs to cooperate with the inspection, and if the on-site supervision finds problems, it will affect its reputation, which in turn will affect business development and customer relationships. Of course, this is also an opportunity to examine oneself with the help of regulatory power, and it is an opportunity to identify problems and eliminate disadvantages. Tian Lihui said to Sino-Singapore Jingwei.

In fact, there have been sponsors who have been penalized after on-site supervision by the exchange. In January this year, the Shenzhen Stock Exchange issued a regulatory letter to Guosen Securities, which showed that during the review process, Guosen Securities was required to pay attention to and prudently express its opinions on the authenticity and compliance of Yinyi Bio's promotion expenses, while Guosen Securities believed that the issuer had a sound internal control system and effectively implemented the relevant regulations. However, in the subsequent on-site supervision, the Shenzhen Stock Exchange found that the issuer lacked internal control over promotional activities, some promoters were actually controlled by the issuer, and the promotion outcome documents were not standardized or a large number of supplements were made. In addition, the on-site supervision also found that Guosen Securities had the problem of insufficient verification of matters related to the issuer's distribution income.

According to the regulatory letter, Guosen Securities' two sponsor representatives, Zhou Meng and Yang Tao, failed to conduct due diligence in accordance with the requirements of the practice standards, while the quality control and kernel departments of Guosen Securities did not fully review the investigation, and the internal control gatekeeping role was not fully performed. The institution and the sponsor representative are subject to self-regulatory measures in the form of written warnings.

Liangang Optoelectronics was questioned three times by regulators

Liangang Optoelectronics is an enterprise with photoelectric signal transmission technology as the core, mainly engaged in the research and development, production and sales of signal transmission connection products, electroacoustic products and 3C supporting products, with a total of 541 million yuan to be raised. The company intends to be listed on the GEM, and the listing application was accepted on June 28, 2023, and received the first round of inquiry letters from the Shenzhen Stock Exchange on July 19, and the first round of inquiries on September 19, 2023, and the second round of inquiries on November 17, 2023, and the third round of inquiries on January 29, 2024.

In the first and second rounds of inquiry letters, the Shenzhen Stock Exchange asked 14 and 11 questions respectively, and CITIC Securities, as the sponsor, issued verification opinions in the reply letters. However, the content of CITIC Securities' reply is basically the same or similar to the view of Liangang Optoelectronics.

In the second round of inquiry letters, the issue of concern was the high shareholding ratio of the actual controller's family. The actual controllers of Liangang Optoelectronics, Xu Yaoli and Xu Yaozhi, directly or indirectly control 91.34% of the voting rights of the issuer, plus their spouses hold a total of 6.66% of the shares of the issuer, and the actual controller family controls 98% of the shares. After the completion of the issuance and listing, the family of the actual controller of the company will still control a total of 72.70% of the company's shares.

In the letter of inquiry, the Shenzhen Stock Exchange requested that the issuer's relevant internal control system be sound and can play a necessary role, whether the corporate governance structure is perfect, and how to protect the rights and interests of small and medium-sized investors, taking into account the high proportion of shares held by the issuer's actual controller's family. In the reply letter, Liangang Optoelectronics said that the company has established a sound governance structure to standardize the operation and improve the internal control system, and also listed 8 listed companies, including Dinglong Technology, Zhenbang Intelligence, Fengmao Shares, Huarong Chemical, Meishuo Technology, Weili Transmission, Galaxy Microelectronics, and Hao Oubo, all of which have a shareholding ratio of more than 90% before listing as similar cases.

CITIC Securities and the issuer's lawyer replied to this question in more than 200 words. According to the verification opinion, the issuer has established a relatively complete governance structure and internal control system, and the internal control systems are sound and can play a necessary role. In addition, the company has set up mechanisms such as the cumulative voting system, the separate vote counting system for small and medium-sized investors, and the arrangement for soliciting voting rights to fully protect the rights and interests of small and medium-sized investors.

Xu Feng, director of Shanghai Jiucheng Law Firm, told Zhongxin Jingwei that if the controlling shareholder holds too much shareholding, it is easier to infringe on the interests of small and medium-sized shareholders, and it is also easier to override corporate governance, but it can also be circumvented through category voting and other means, which is considered in the design of the system.

In addition, in response to the inquiry letter, CITIC Securities said that there is no significant difference between the issuer's "optical communication" products and the mainstream optical communication products announced by listed companies such as Taichen Optics, Zhishang Technology, Changfei Optical Fiber, and Borche Technology, and there is no confusion about the concept of "hot spots".

How to consolidate the responsibility of the "gatekeeper" of the 7 sponsor projects withdrawn during the year?

According to Wind statistics, as of March 23, 2024, a total of 276 sponsor projects have been sponsored for the initial listing of securities firms this year, of which 78 projects have been voluntarily withdrawn. CITIC Securities' IPO sponsorship projects ranked first in the industry with 31, of which 7 projects were voluntarily withdrawn, with a withdrawal rate of 22.58%.

CITIC Securities has voluntarily withdrawn 7 sponsorship projects, namely Adopt a Cow and China Aviation Fuel, which plan to be listed on the main board of the Shanghai Stock Exchange, Huimang Microelectronics, Shenzhen Bona Precision, Chengdu Hantong Integration, Shenzhen Han's Sealing and Testing, and Shanghai Ark Baifa, which plans to be listed on the Science and Technology Innovation Board.

In addition, on January 30 this year, the China Securities Regulatory Commission notified the progress of the phased investigation of the *ST Zuojiang financial fraud case. According to the China Securities Regulatory Commission, on November 24, 2023, the commission opened an investigation into *ST. It has been preliminarily ascertained that the financial information disclosed by *ST Zuojiang in 2023 is seriously untrue and suspected of major financial fraud. The case is currently under investigation, and the commission will ascertain the facts of the violation as soon as possible and seriously deal with it in accordance with the law. CITIC Securities was the sponsor of *ST Zuojiang at the time of its listing and performed continuous supervision duties with the company from 29 October 2019 to 31 December 2022.

As for how to consolidate the responsibility of the "gatekeeper", Tian Lihui said that in order to consolidate the responsibility of the brokerage institutions, it is necessary to increase supervision and law enforcement, investigate and punish violations in a timely manner, and form an effective deterrent; it is necessary to urge the brokerage institutions to improve the level of governance and improve the management system to ensure that various business activities are carried out within the framework of compliance; it is necessary to strengthen the training and education of the practitioners of the brokerage institutions to enhance their professional quality and sense of responsibility; it is necessary to improve the quality of the information disclosure of the brokerage institutions, so that the market and the public can see their "gatekeepers". "Implementation of responsibilities.

"After the full registration system, if you want to consolidate the gatekeeper responsibilities of intermediaries such as brokers, you must first assign responsibilities and clarify 'who will do it, who is responsible', and the brokerage institutions should arrange the work steps and work links in the system and strictly implement them. At the same time, exchanges and other institutions perform corresponding supervisory duties. and in the subsequent registration stage, if problems are found, the SFC will hold them accountable. Zhao Xijun said that in addition to the above methods, public opinion and external supervision of professional media are also very important.

In March 2024, Wu Qing, chairman of the China Securities Regulatory Commission, said in response to reporters' questions at the economic theme press conference of the second session of the 14th National People's Congress that at present, the China Securities Regulatory Commission conducts on-site inspections of enterprises under review, and the exchange also conducts on-site supervision, but the coverage of on-site inspections and on-site supervision is still very limited.

(The views in the article are for reference only and do not constitute investment advice, investment is risky, and you need to be cautious when entering the market.) )

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Editor in charge: Wei Wei Luo Kun