China PE managers view regulatory overhaul as positive
Private equity fund managers have welcomed the prospect of a better regulated industry as the country's securities watchdog CSRC steps in to draft new legislation.
They are also hopeful that the China Securities Regulatory Commission (CSRC) will lift an 11-month ban on the listing of initial public offerings (IPOs).
Authorities have been discussing for years whether the CSRC or the National Development and Reform Commission (NDRC) should oversee the nation’s private equity and venture capital industry.
It comes as the shrinking industry grapples with ways to engender trust and encourage greater participation. Investment in China’s PE industry totalled $19.9 billion in 2012, down 31% from 2011.
And last week it was confirmed that the CSRC was already drafting new laws to govern the industry. It comes after the commission stepped in to jointly regulate the industry alongside the NDRC in July.
The CSRC says it aims to introduce the new laws as soon as possible. From there on, the CSRC will “regulate and manage every kind of private equity fund” while coordinating with the NDRC, a CSRC official states.
PE managers expect the CSRC to take on more day-to-day industry regulation over time, including oversight of compliance, investor protection and fundraising, with the NDRC focusing on taxation issues and promotion. To date details on how the regulators will share responsibilities has not been provided publically.
As things stand, private equity players don't anticipate an immediate impact on the way they do business. For example, if they want to launch new funds managers will contnue to file paperwork with the NDRC.
“From our understanding, the CSRC will regulate private equity funds. However, NDRC will still oversee the industry, such as the filing for product launches,” Gao Weiwei, deputy general manager at PE fund Tianjin Bohai Haisheng, told AsianInvestor at the China Venture Investment Conference in Shenzhen last Friday.
While there has been some staff sharing between the two bodies – Liu Jianjun, former director of the financial affairs division at the NDRC's Department of Fiscal and Financial Affairs, moved to CSRC’s investment fund division in May – his role in overseeing the PE industry has not changed.
“I don’t think there will be very huge impact to the industry,” adds Charles Xia, founding partner of Shanghai-based Ivy Capital. He says it is a good thing that the CSRC will take over some industry oversight, as it will be able to control illegal fundraising and install industry discipline.
However, he does add that his firm, along with peers, will hope for a degree of “autonomy and freedom with innovative investing”.
Industry players also hope the CSRC will end the 11-month IPO suspension, implemented last October to better screen listing candidates following some false IPO prospectuses, which has hurt investor confidence.
One example is Wanfu Biotechnology, which raised Rmb425 million ($69.4 million) and was listed on 2011 on the Shenzen Stock Exchange. The CSRC disccovered last year the company provided false financial information as early as 2008 when it began preparing to list. This inflated its revenues by Rmb740 million and net profits by Rmb160 million. Wanfu has since been fined Rmb300,000.
The CSRC also suspended its underwriter Ping An Securities from IPO sponsorship for three months, and fined it Rmb51.1 million.
Other examples include Tianneng Technology and Xindadi Biotechnology, which provided false financial information in 2011 and 2012, respectively. Both IPOs were suspended and the companies' underwriters punished.
Although the IPO ban has been effective – of the 890 companies in the IPO pipeline as the CSRC imposed the suspension, 270 have cancelled their applications, according to AsianInvestor sister publication FinanceAsia – it has its opponents.
Wang Shouren, the secretary general of Shenzen Venture Capital Association, says “stopping the IPO market was a big mistake”, noting that investors can make their own judgements on investments in listed companies.