Issue 483, August 23
Translated by Tang Xiangyang
Original article:[Chinese]

In the statements of the three companies listed in ChiNext on August 20, the promotional tour expenses have been excluded from the “issuance costs”. This is an interesting phenomenon. Though this event has not attracted much attention, it has far-reaching implications.

Promotional tour expenses is money spent during the issuance process, including advertising costs, road show costs, public relations costs and reception costs. This is a huge expense that will be paid by investors, although the latter does not understand what the cost entails.

This expense is hidden and is deducted from the money collected through issuance cost. However, a listed company has never published the details of their issuance costs and thus no one knows where this money goes. That is why there are always investors who suspect corruption behind the expenses.

Now, the China Securities Regulatory Commission (CSRC) wants to change the situation. At the end of June, when the accounting department of the CSRC was explaining the Relevant Issues Concerning the Implementation of Accounting Standards to Supervision of Listed Companies, it clearly stated, “All the advertising costs, public relations costs, road show costs, reception costs and other costs should be contained in the profits and losses of the current term.” Meaning, all previously hidden expenses will be published in the annual reports of listed companies and included in their profits.

The above three newcomers listed on ChiNext have been listed based on the new CSRC regulations. This is a change we must keep an eye on.

Under the previous system, all listed companies, especially private ones, had to experience a painful IPO. A secretary of the board of directors of a private enterprise located in Fujian Province stayed in Beijing for nine months. While there, his main job was to treat everybody that was beneficial to the IPO of his company to dinner and offer them gifts. Another example is an Anhui entrepreneur who after travelling to Beijing over 30 times and spending several million yuan finally reached the stage of declaring his company materials to the CSRC.

After analyzing the issuance costs of companies that recently became listed, we can confirm the testimony provided by these two companies. Aside from normal expenses, including insurance, online issuance, prospectus printing, accountant and lawyer fees and an assessment fee, the other expenses produced by the IPO, such as advertising costs, road show expenses, costs of public relations and reception costs, are also astonishing.

Our statistics show that the issuance costs of some listed companies may account for 15 percent of the issuance prices of their stocks. This is really inconceivable in an inexpensive market like the A-share market. Even in the pricier American market, issuance costs hover around only 10 percent of their stock prices.

Under the new rules of the CSRC, the hidden expenses of listed companies will become explicit. We believe that listed companies will use restraint because, after their expenses are included in their profits, their business performance their first year after IPO will be much affected. This is especially true of companies with small-scale stock that spend too much on issuance costs.

This is a change that needs to be encouraged. However, there are two consequences that require further clarification.

The first is that investors in the secondary market will bear the above expenses, when they are transferred from the first market phase to the second. The other is that listed companies will try to mitigate the effects of these expenses on current profits and losses by increasing other expenses. So does including these costs in current profits and losses really indicate where the money has gone?

The CSRC hopes so. But, as a supervisor, they should also consider reducing lobbying costs by establishing a more transparent system. This is not difficult to understand. As long as there is a lack of transparency and bending the rules through excessive lobbying, companies who want to be listed will spend any amount of money.

Making sure issuance costs are transparent is a responsible measure that benefits ordinary investors who will end up paying the costs. Investors, as well as the companies to be listed, need to know where their money is going.
 
This article was edited by Rose Scobie and Ruoji Tang