China, under pressure to improve the quality of its IPOs, will tell underwriters and auditors of companies looking to list on mainland markets to review their financial statements and ensure that all is in order, sources with knowledge of the plan said.
After their review, the China Securities Regulatory Commission (CSRC) will randomly make a selection from the nearly 900 initial public offering applicants and conduct its own checks, the sources told Reuters on Wednesday, declining to be identified ahead of official announcements.
The regulatory change dovetails with the CSRC's push to restore investor confidence in the stock market that has been rocked by reports of insider trading and other wrongdoing.
The image of Chinese IPOs has also been tarnished overseas following a spate of accounting scandals involving mainland companies listing in the United States in 2011.
(Read More: US SEC Charges China Top Accounting Firms)
The CSRC will focus on areas such as fraudulent and illegal transactions as well as loss provisions, said the sources, who attended a closed-door meeting between the securities regulator and underwriters.
The CSRC posted a statement on its website late Wednesday broadly confirming the Reuters report.
"This is apparently aimed at weeding out some unqualified IPO applicants," said Liang Jing, an analyst at Guotai Junan Securities Co. "It will add more burden to underwriters, and obviously, some deals would have to be cancelled."
The reviews, or so-called self-inspections, will last until the end of March, said the sources.
Frozen IPO Market
This could mean China's IPO market, frozen for almost three months by regulators worried that additional supply would further hurt the stock market, could be put on hold until the end of March, analysts said.
The CSRC has rolled out measures in recent weeks to ease funding pressure on the stock market, where 882 companies are queuing to be listed.
China has lowered the bar for companies to list in Hong Kong instead and has encouraged firms to raise money through the bond market and over-the-counter equity market.
(Read More: Firms Ditch B-Shares for Better Luck in Hong Kong)
CSRC will also reject IPO applicants for the Nasdaq-style ChiNext board which have reported a drop in profit in 2012 compared with a year earlier, the sources said.
IPO issuance in mainland China plunged 64 percent in 2012 from the previous year to about $14.4 billion, according to Thomson Reuters data.