Bosses of companies in China planning to list on the stock exchange often have to spend millions or even tens of millions of yuan on massive PR campaigns or to curry favor with government officials. Owners of some small and medium enterprises have even had to borrow money to cover such expenses in the hope that they can pay the money back after their IPO launch.
Such expenses often have to be borne by the company's executives out of their own pocket, since they cannot be listed as corporate expenses due to the absence of invoices. Many bosses strive to keep their heads above water until their share listing can be achieved, after which they can finally utter a sigh of relief as funds come in to fill the pothole.
The Beijing-based Economic Observer says these hidden expenses during the process of going public often reach 10-20 million yuan (US$1.6 million-$3.2 million). In many cases, venture capital firms or investment step in to help the entrepreneurs stay the course.
The newspaper cited the example of an optoelectronic component supplier, which after two years of preparation finally succeeded in listed its shares on the Shenzhen small and enterprise board in the first half of this year. The chairman of the company claimed that he spent 6 million yuan (US$940,000) for positive media coverage, including advertisements and cash payments.
PR fees alone can reportedly reach 4 million to 10 million yuan (US$630,000-$1.6 million) as there are over 200 media outlets covering IPO news.
Smoothing relations with government officials also comes at a big cost, including outlays for winning government subsidies and tax incentives for small and medium enterprises. Typically, enterprises have to pay 40% of the resulting benefits to the government officials in charge.
Securities firms underwriting IPOs often have contribute one fifth of the underwriting fees to help finance the hidden expenses involved in share listing.