China's IPO action has been locked in ice since October by China Securities Regulatory Commission (CSRC) officials intent on boosting investor confidence and improving scrutiny of stock market hopefuls.
Yet the heat is on for aspiring executives at more than 800 companies who, despite the freeze, have continued lobbying CSRC for permission to launch initial public offerings on the Shanghai and Shenzhen exchanges.
No one knows when CSRC might thaw the market for new listings. So executives have been busy door-knocking deep inside the commission at its dual "public offering departments" – one that reviews IPO applications for the Shenzhen Stock Exchange's ChiNext growth board, the other for the Shanghai Stock Exchange A-share market.
They've also been busy wining, dining and warming up to members of CSRC's elite Public Offering Review Committee (PORC), which ultimately decides the fate of every IPO application that's survives the commission's lengthy company review process.
In pursuit of warm relations, Caixin has learned, some IPO-hungry company executives have played along with rent-seeking CSRC officials. They've also paid intermediaries who charge enormous fees for access to key CSRC officials. Tens of millions of yuan may have traded hands in recent years.
Since taking office in October 2011, CSRC Chairman Guo Shuqing has tried to clean up the agency via a large-scale personnel shuffle. As part of the change, many public offering department and PORC officials have traded their positions with other CSRC staffers. But problems persist.
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Unique among the world's securities market regulators, CSRC strictly controls new listings by thoroughly investigating financial conditions for each IPO applicant. But IPO approval power is concentrated inside the public offering departments, each of which assigns only two review staffers and two directors per application, and the PORC.
Ten application process steps and "11 key people can decide life or death for a public offering," said an executive at a private company that's applied for an IPO. The executive, like most sources for this story, spoke with Caixin on condition of anonymity.
C'est La Vie is an upscale restaurant near CSRC's headquarters on Beijing's west side that serves shark's fin soup, abalone and other delicacies. A single tab can run up to 1,000 yuan per diner.
Even pricier than the meals, however, are the deals negotiated around the restaurant's tables when executives from IPO-applicant companies get a chance to treat one or more CSRC officials.
A separate expense for an applicant is what's paid to an intermediary agent whose job is to arrange get-togethers at C'est La Vie and similar venues. An agent in charge of a single night's meal can pocket more than 100,000 yuan.
On top of that, sources said, a single CSRC official who plays a role in an application review can demand an illegal payoff in the 300,000-500,000 yuan range per IPO hopeful.
Company executives, intermediaries and executives working for the underwriters of proposed IPOs confirmed for Caixin the secretive process through which a company can basically buy CSRC's approval for an IPO.
Among those at the receiving end of the money train are members of PORC, which assigns seven of its 60 members to a single case. Members review public offering department reports and ultimately judge an IPO plan worthy of the market or not.
Most PORC staffers work full-time for CSRC, while the rest are hired from law and accounting firms to review applications as needed. At times, CSRC officials draft lawyers and/or accountants to serve on a PORC. Law and accounting firms are happy to accommodate because typically a link to PORC is a boon to their business.
In a normal year, a single PORC member can review up to 50 companies, said a source close to the process, adding that about 80 percent of the applications are approved.
Simple math points to the considerable financial advantages available to those PORC members who accept payoffs. The source said a single corrupt CSRC official can make about 10 million yuan a year.
"Of course, not every member accepts money," the source said. "Those who do (accept) don't take money from every company" because "security is the No. 1 concern."
A source at a securities firm's underwriting office said "all kinds of measures are used to give favors to" a rent-seeking PORC member who is tapped to vote on an IPO application. "It's an open secret."
Caixin contacted several PORC members. None would discuss these allegations of malfeasance.
The Big Eleven
It's been argued that the groundwork for graft was laid when CSRC instituted a lengthy, generally opaque IPO application process in 1999 and strengthened it with a 2006 amendment to the Securities Law that made preliminary reviews of IPOs mandatory.
The process usually starts at the narrow, front-door security checkpoint at CSRC's headquarters at the Fukai Office Tower in Beijing. That's where anxious representatives from securities firms daily line up with heavy boxes filled with IPO application documents.
Some documents eventually reach the ChiNext public offering department on the sixth floor or the Shanghai exchange department on the 11th floor.
Some light was shed on the murky process of reviewing and deciding the fate of IPO applications in May 2006, when CSRC outlined procedures for review committees. But details of the procedures were kept out of the light of public scrutiny until last year.
CSRC established a step-by-step process that every aspiring company must follow. Two public offering department staff members give each application a preliminary review, with one official focusing on legal issues and the other accounting.
A preliminary review staff can quickly sift through documents and decide whether an applicant is eligible for further review. If the light is green, the public offering department's directors meet with a pair of preliminary review staff members to discuss qualifications and compile a list of follow-up questions for company representatives.