Shanghai Stock Exchange bars S2C from IPO for fraudulent profits

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In a stunning twist, the Shanghai Stock Exchange has wielded its hammer of justice, barring local chip maker S2C from listing its shares for a staggering five years. This seismic move marks the first moratorium under China’s newly minted registration-based IPO system, a game-changer rolled out in 2023 to shake up the capital markets. S2C, with its dreams of integrated circuit electronic design automation (EDA) glory, finds itself in the hot seat after inflating its 2020 profits by a jaw-dropping 12.5 million yuan (US$1.7 million), a whopping 118.5 percent exaggeration. The exchange didn’t mince words on Tuesday, calling the infractions “obviously subjective and intentional,” a damning indictment of the company’s ethical compass.

Just three months prior, the mainland bourse had slapped the chip maker and its executives with a hefty fine totaling 16.5 million yuan for their rule-flouting antics. The creative accounting didn’t end there—S2C was caught red-handed forging transactions, pre-emptively confirming earnings, and reporting fantasy-level lower costs. This theatrical display of financial wizardry didn’t amuse the exchange, which has now ruled with an iron fist, barring S2C’s IPO documents from even gracing its review table for the next half-decade. The company’s top brass, meanwhile, are blacklisted from similar executive roles for the next three years, ensuring their financial sorcery days are on indefinite hiatus.

S2C’s initial aspirations to debut on the Shanghai Stock Exchange in August 2021 were dashed when the company withdrew its application in July 2022. This retreat came on the heels of a China Securities Regulatory Commission (CSRC) probe that unearthed the same falsified financial results. The crackdown on S2C is a headline-grabber, especially as it’s the maiden moratorium since the nationwide rollout of the registration-based IPO system in February 2023. This new approach shifts the IPO vetting responsibility from the CSRC to stock exchanges, aiming to streamline listings and bolster corporate financing. Yet, S2C’s saga suggests the path to the capital markets might be more treacherous than ever for those with skeletons in their closets.

This saga unfolds against the backdrop of one of China’s largest auditing scandals, with Evergrande’s collapse in 2021 revealing a staggering US$78 billion revenue inflation. Evergrande’s auditor, PwC, is now facing an exodus of clients. The CSRC, under the new stewardship of Wu Qing—dubbed the “broker butcher”—is tightening the noose on both potential and existing IPOs, striving to cleanse the US$9 trillion stock market of unworthy contenders. The crackdown has sent small cap stocks into a tailspin, as jittery investors flee, fearing a purge. However, the CSRC tried to soothe frayed nerves last Friday, assuring that delistings aren’t expected to surge dramatically in the short term.

(Source: SCMP | Asia Financial | Global Finance)

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