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The first delisting for IPO fraud triggers curious trading fallout
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DANDONG Xintai Electric Co is a company facing delisting from China’s ChiNext board, but you wouldn’t know it from recent trading volumes in the stock on the Nasdaq-style exchange.
On July 12, the shares of the electrical-equipment maker resumed trading after a suspension in May. The price plunged. That was not unexpected. What was inexplicable were the numbers of investors willing to buy shares being dumped like hot potatoes.
The China Securities Regulatory Commission, as part of its get-tough campaign on illegal or shady market practices, ordered the company be delisted after it was found guilty of providing false information in the prospectus for its 2014 initial public offering.
The case sets some precedents. Xintai would be the first company in China ever delisted for IPO fraud and the first to be bounced off the ChiNext board on the Shenzhen Stock Exchange.
At a recent media briefing, Zhang Xiaojun, spokesman for the regulatory commission, said the company violated the bottom line of integrity and the capital market has zero tolerance for such behavior.
Under the process of a forced delisting, shares of Xintai will be available for trading for 30 trading days after transactions were resumed on July 12. After that, all trading will be suspended again pending a final decision on delisting by the Shenzhen exchange.
On July 12, the company’s shares dropped by the daily maximum 10 percent to 13.10 yuan (US$1.96). But 40 million yuan of shares changed hands, a surprising volume for a company going under.
According to a calculation by the weekly newspaper China Fund, more than half of the shares were bought in small and medium lot sizes, signaling activity by individual retail investors.
Was there some trickery afoot?
According to information circulating on social media, mass text messages sent under the name Shenwan Hongyuan Securities Co Ltd went out investors, urging them to subscribe for IPO shares under the stock code 300372 — which actually is the code of Xintai.
The ruse played on the investor mania for new shares, which usually generate huge initial profits as investors in the secondary market seek to pick up more shares than they were allowed in the primary offering.
Shenwan Hongyuan later issued a statement saying its name had been falsely used, and the brokerage never sent such a message. Even Xintai, in a filing with the exchange, disavowed the hoax.
The Shenzhen Stock Exchange issued a warning to the company and brokerages about exposing investors to potential risks. All the clarifications seem to have little effect. In the days that followed, nearly 90 million yuan of Xintai shares traded hands.
“I have no clue why there are still people buying the company’s shares because the delisting of Xintai is already a done deal,” said Qian Qimin, an analyst at Shenwan Hongyuan. “Whoever is buying them is taking a huge risk.”
In China, some companies threatened with delisting do attract speculative investors who are betting on their value as potential backdoor listings. Also, there are funds that chase delisting shares on the expectation that the companies will be restructured and rise again on over-the-counter markets. In some cases, delisted companies may have opportunities to relist if they meet certain criteria.
However, as a ChiNext-listed company, Xintai can’t be used as a back-door listing, according to regulatory rules. And Zhang made it clear at his media briefing that the company’s many deceptions disqualify it from ever listing again.
Wen Deyi, chairman of Xintai, said he is considering a plan to declare the company bankrupt, with debt of more than 600 million yuan.
Shares of Xintai are expected to drop by their daily limit in the remaining trading days. GF Fund Management Co Ltd reduced the estimated valuation of Xintai shares to zero.
Some investors have taunted those still purchasing the shares as “suicide buyers.”
“Buying Xintai now is equivalent to throwing money into water,” said a post in an online stock trading community. “Could it be that there are some wealthy Samaritans trying to save trapped shareholders?”
The shenanigans have prompted some to suggest conspiracy theories. Are some big account players selling and buying Xintai shares from one another to give the false impression that the stock is still actively traded, hoping to rope in enough naive retail buyers to give themselves a selling exit?
Tu Jun, analyst of Shanghai Securities Co Ltd, dismisses that likelihood.
“It would be technically difficult, considering the huge selling pressure and the cost of transaction fees,” he said.
Tu said the more likely explanation is that some investors simply aren’t paying enough attention to what’s going on in the market and see the declining price of Xintai shares as a buying opportunity.
A number of brokerages have stepped up efforts to warn investors about the risk, through pop-up notices on their trading terminals and message sent to clients. Orient Securities Co Ltd is now requiring clients who want to purchase Xintai shares to show up in person rather than execute transactions online.
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