IPO Bankers Become Frogs in Hot Water Amid China Market Halt

By Bloomberg News

Shen Wei, one of the first 600 investment bankers authorized to sign off on initial public offerings in China, said the license that made him one of the “golden collared” has lost its magic.

The teacher’s son studied 14-hours a day for a month in 2004 to qualify after China’s securities regulator mandated that two so-called baodai, or sponsor representatives, conduct due diligence and sign off on every IPO to curb fraud. Demand for such bankers is now being eroded by a freeze on IPOs, a surge in people getting licensed and an easing of underwriting rules. “The baodai are like frogs in a pot of hot water that’s been on slow boil for nine years,” said Shen, 41, who is executive director of Citigroup Inc. (C)’s local joint venture in Shenzhen, overseeing a team of 20 bankers. “The days of excess pay are gone. Rationality has returned.”

Nine years after winning the license that proved to be a “crucial turning point” for Shen, China’s worst IPO market in seven years has hastened the end of fat payouts and fast-track careers for the country’s more than 2,300 baodai. Securities firms are cutting or ending allowances that were as much as three times salaries and firing licensed bankers who aren’t on deals, while the pool of qualified people expands.

Creation of China’s elite class of bankers -- culled through a state-administered examination that in 2010 had a 1.05 percent pass rate -- preceded a five-year boom in IPOs, culminating in 2010 with China overtaking the U.S. and Hong Kong to become the world’s largest market for first-time sales.

IPO Record

That year, 344 companies raised a record 488 billion yuan ($78.6 billion) from IPOs in China, according to data compiled by Bloomberg. The supply of new stocks led the ShanghaiComposite Index to fall 14 percent, beginning a slump that made China the worst-performing major stock market in Asiaover three years. In an attempt to curb the slide, the securities watchdog froze the IPO market in October.

By then, local firms competing for market share were engaged in a talent war for baodai. Foreign banks such as Goldman Sachs Group Inc. (GS), which are allowed to underwrite sales only through joint ventures, focused more on Hong Kong deals.

“China’s investment banking was once dominated by people with connections,” said Shen, who in 2003 was considering quitting investment banking to boost his annual salary of 100,000 yuan, or about $16,000. “Back then, for someone from an ordinary background like me, the baodai exam was the only way to reverse my fortunes.”

Monthly Allowances

Licensed bankers are required by the China Securities Regulatory Commission to determine that financial data and other information in the offering documents are accurate, and ensure proper corporate governance at the companies for as long as three years after the IPO.

At the height of the fundraising boom, baodai commanded a monthly allowance ranging from 20,000 yuan to 80,000 yuan on top of their salaries, said Ban Ni, a former banker who used to head Shanghai-based Donghai Securities Co.’s (DOSCLZ) investment-banking operations between 2010 and 2011.

Ban, who refused to disclose her age, failed to clear the licensing exam while working at Donghai and quit the industry in 2011. She’s now writing a book about her experiences at the investment bank while studying for a master’s in business administration in Hong Kong.

The monthly allowance made up half the pay for some licensed bankers at China Investment Securities Co. in Shenzhen, an executive from that firm said, asking not to be named because he’s not authorized to disclose compensation information.

Signature Fees

While other bankers would get one-time bonuses linked to specific deals they worked on, the monthly payments insulated the baodai from such “feast or famine” conditions, said Ban.

The licensed bankers, initially limited to working on one equity offering at a time, also collected a so-called signature fee that ranged from 400,000 yuan to 1 million yuan for each IPO that they approved, Ban said.

That windfall accounted for as much as half of his annual income in some years, Citi Orient Securities Co.’s Shen said.

The outlook for baodai began to sour as more bankers, lured by the additional compensation, raced to be qualified. The ratio of people who cleared the exam -- which tests bankers on finance and money supply to legal issues and accounting -- improved to 14 percent in 2011. The results for the latest round of tests, held in December, haven’t been published.

Their numbers may climb higher as the Securities Association of China begins to administer the qualifying exam twice a year.

Market Share

The limit on the number of deals each baodai is allowed to work on at one time means that firms that employ more of licensed bankers could win a bigger share of the market.

The top-ranked brokerages for IPO underwriting last year -- Citic Securities Co. (600030),Guosen Securities Co. (GUOSNZ) and GF Securities Co. (000776) -- together employ 371 licensed bankers, according to the securities regulator.

In comparison, Goldman Sachs Gaohua Securities Co. (GMGHCZ), the first foreign venture to win a license to underwrite shares and bonds, has 15 baodai. UBS Securities Co., which obtained its license in 2006, has about 28 such bankers on its payroll. JPMorgan First Capital Securities Co., which began operations in 2011, has 17, while Morgan Stanley Huaxin Securities Co. has 22.

“Baodai are important, but not critical,” Ding Xiaowen, co-head of the investment-banking division at UBS Securities, said in an interview. His firm avoided practices such as giving the licensed bankers autonomy on deals and paying the teams a cut of the underwriting fees, he said.

Falling Demand

The securities watchdog last year also relaxed some norms, doubling the number of IPOs that each of the licensed bankers may work on simultaneously to two.

“The baodai were expensive even when they weren’t working on deals,” UBS’s Ding said, adding that the new rules have eased the demand for those bankers. “With 20 baodai, we can do 40 deals.”

At the same time, IPOs began to lose steam. The number of new listings fell to 147 last year, with the amount raised by the companies dropping 80 percent from the record set in 2010 to 98.8 billion yuan, according to data compiled by Bloomberg.

The situation has deteriorated since the IPO freeze began in October. About 765 companies were awaiting approval for new offerings at the end of last month, according to the CSRC.

About 162 companies have also withdrawn IPO applications since December, when the securities regulator asked the issuers and their bankers to review their filings to weed out fraud. The CSRC said on April 3 that it would examine 30 reports picked randomly from among 610 that completed the review.

Great Depression

The abrupt halt to IPOs has been damaging for the local brokerages because underwriting new stock offerings accounted for about 70 percent of their investment-banking revenue from 2009 through 2011, estimated Shenyin & Wanguo Securities Co (SYWGCZ).

Baodai face a “very challenging time,” said Erick Zhou, a Beijing-based recruitment consultant atClarius Group Ltd. (CND)’s Lloyd Morgan Executive division, whose clients have included both foreign and local securities firms.

“The traditional investment-banking business of the baodai is in a Great Depression,” said Zhou. “They were expensive in the past because they were in short supply. Not anymore.”

A baodai in Shanghai, who asked not to be identified because he isn’t authorized to talk to media, said his monthly allowance was cut by 40 percent late last year. The 60,000 yuan a month that the local brokerage began paying him after he was licensed in 2011 had accounted for about three-quarters of his almost 1 million yuan annual pay, excluding bonuses.

A 300,000-yuan signature fee for his first IPO also hasn’t been paid out yet, and won’t be until the securities regulator resumes approvals, the 31-year-old banker said.

Ending Allowances

Citic Securities, the country’s largest brokerage by market value and the top underwriter of domestic IPOs last year, was among the first to cancel the monthly allowance for their licensed bankers, the 21st Century Business Herald reported in October, citing unidentified people. Joyce Ho, a Hong Kong-based spokeswoman for Citic, declined to comment.

Huatai Securities Co. (601688), which ranked fifth in underwriting domestic IPOs last year, ended its practice of paying a monthly allowance for the licensed bankers in October, according to an e-mailed statement from the brokerage.

Those firms aren’t the only ones to pare back perks for baodai, according to Zhou. Investment banks that had paid as much as 1.5 million yuan as a sign-on bonus to entice baodai from other firms and help pay off their previous employment contracts are now refusing to make those payments, he said.

As the industry evolves, the baodai qualification may eventually become just a basic requirement for mainland investment bankers, Citi Orient’s Shen said.

Lost Sheen

“The days when high salaries came automatically with the qualification are gone,” said Shen, who refused to disclose his current compensation. “The profession will now focus on bankers’ expertise, resources and collaboration capabilities.”

As the market slump deepened, some brokerages even began cutting loose licensed bankers who weren’t already on a deal, said Zhou. At about the same time, baodai began placing calls and walking in to his office in Beijing’s Chaoyang district to drop off business cards.

“That’d never happened before,” he said. “It used to be the recruiters chasing after them.”

Conditions may not improve for licensed bankers under Xiao Gang, who was appointed last month as the head of the CSRC. Xiao will probably continue with his predecessor Guo Shuqing’s efforts to relax rules for overseas IPOs and offer alternative sources for fundraising, such as expanding an over-the-counter market for equity sales by small companies, said Wang Aochao, an analyst at UOB Kay Hian Ltd. in Shanghai.

‘Buyer’s Market’

Expansion of the OTC market in particular may be a blow to baodai, who aren’t required to sign off on those offerings. More companies may choose to raise money on the OTC exchange, which offers a simpler approval process and doesn’t require companies to get clearance from the CSRC, said He Zongyan, an analyst at Shenyin & Wanguo in Shanghai.

Citi Orient’s Shen agrees that the tables have turned for the licensed bankers.

“Between 2009 and 2010, it was a seller’s market, with baodai dictating the terms because we needed them,” he said. “It’s a buyer’s market in 2012 and 2013. Even if you offer to join us, I may not take you.”

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net

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