(Yicai Global) March 20 -- Southwest Securities Co. [SHA:600369] received a second investigation notice from the regulator in less than one year, the company said on March 17. China Securities Regulatory Commission (CSRC) launched an investigation against it due to suspected violations of the securities law and regulations committed when the company acted as a financial advisor to mergers and acquisitions between some listed companies.
During the investigation, the CSRC will not accept any applications recommended by Southwest Securities as the sponsor, any cases recommended by relevant sponsor representatives, or any documents issued by the company as an independent financial advisor. The company's investment banking business and total earnings are also expected to be affected by the investigation.
It means that all its IPO business operations will be suspended during the investigation period. Market insiders believe the company got into trouble this time because of its involvement with the merger 'scam' carried out by 9Top Office Services Group Ltd. and AnShan Heavy Duty Mining Machinery Co. [SHE:002667], in which Southwest Securities acted as the financial advisor.
The CSRC launched a crackdown on toxic assets and vowed to thoroughly investigate intermediary organizations involved in relevant cases. Southwest Securities was warned of conducting illegal financial advising businesses in listed companies' M&A activities. Several market insiders believe that there are connections between the investigation and the CSRC's latest move, although the company said that it was "unsure" about such connections.
At worst, the CSRC may cancel the company's investment banking business license, a brokerage senior executive suggested, adding that the outcome depends on a complex interplay between different factors.
Investigations conducted by the CSRC revealed that 9Top Office Services inflated its service income by over CNY260 million (USD37.6 million) in 2013 through 2015, inflated its trade revenue by more than CNY570,000 in 2015, and its bank deposits by CNY300 million. The company invested in wealth management products and time deposits using borrowed money to cover up the gap in cash flow, and provided guarantees for the lender's affiliates.
Through such malpractice, it packaged itself as the owner of 'high-quality' assets worth CNY3.71 billion, and carried out the merger 'scam' with AnShan Heavy Duty Mining Machinery, attempting to float its shares on the stock market through a backdoor listing. Serious misrepresentations and omissions have been identified in information disclosures made by the two companies. As the independent financial advisor, Southwest Securities failed to notice or notify such irregularities during the merger.