Beyond checking the books

Recent financial inspections of companies planning Initial Public Offerings in the domestic stock market, have led to 162 companies withdrawing their IPO. However, there are still 610 companies on the waiting list, only increasing the punishments for those companies that violate the rules and punishing their sponsors will clean up the market, say an article in the Beijing News. Excerpts:

The large-scale withdrawal this time at least helped investors get rid of 162 risky companies. But it does not mean the rest are all high-quality companies. Many of the companies gave up their IPO plans at the last minute, just before the financial inspections began.

But, because they have already spent money and energy preparing their IPOs, many other risky companies have hesitated to withdraw and are still gambling on muddling through the financial checks, knowing that once they get successfully listed, they can easily recover the costs of the IPO with the money they raise in the stock market.

Most of the companies that have withdrawn are medium-sized and small enterprises, and among the 162 companies, there are 106 companies applying for an IPO in the Growth Enterprise Market, rather than the main board. Analysts believe that it does not mean the large companies are healthier or with lower risks, it only means that the larger companies may be more confident of getting through the inspections because of the good background of their sponsors.

During these financial inspections, those companies that act as sponsors for the more problematic companies should also receive punishments. As sponsors, they should be responsible for the companies they recommended, and they should have joint and several liabilities instead of just being paid to be sponsors.

Besides such financial checks, it seems that only increasing the punishments for those that break the rules and creating a retroactive liability mechanism to deter the sponsoring of problematic companies will clean up the market.