Ambiguous Rights and Responsibilities among the Sponsor, the Issuer, the Regulator, and Other Intermediary Institutions
Ambiguous Rights and Responsibilities for the Sponsor Representative and the Sponsor
Institution It is very difficult to set the criteria to determine whether the sponsor has conducted due diligence investigation. The sponsor and the sponsor representative should conduct due diligence investigation on the issuer and its substantial shareholders and actual controllers. However, an objective standard with which to determine whether the sponsor and sponsor representative have conducted due diligence investigations does not exist. Subjective judgments by various parties alone are not convincing.
It is a dual sponsor system that China is implementing. Both the sponsor representative and the sponsor organization have sponsor duties. The current system doesn't specify the respective rights and obligations of the sponsor institution and the sponsor representative, which has led to the reality that the sponsor representative actually bears greater duties and risks than the sponsor institution. Because of the employment relationship between the two, the sponsor representative is not able to provide securities sponsoring services independently, and the sponsor institution has the final say about the sponsor's work. Sponsor representatives have to be responsible for the interests and goals of the company and department that hire them, thereby losing their independence.
The sponsor is not able to take on responsibilities regarding the quality of the company, the reliability of the information disclosure, and the continuous supervision on the issuer's proper operation, integrity, and information disclosure. Sponsor institutions are also in a very disadvantageous position. They have to compete with each other in the sponsor market, or even collude with the issuer. Therefore, some "congenitally flawed" companies have been listed with a "makeover." However, when it comes to accountability, the sponsor representative tends to be held accountable to a greater extent than the sponsor institution. Once a problem is found with the issuer, the Securities Regulatory Commission punishes the sponsor representative, while the sponsor institution can often escape punishment. The quality of the listed company therefore depends completely on the overall capability and competence of the sponsor representative, which effectively makes the dual sponsor system a singular system.