Two of China's leading securities firms, China Galaxy Securities and Guotai Junan Securities, are planning to go public on the Chinese mainland, according to a recent report by Nanfang Daily.

The striking thing is that the two companies are acting as each other's listing sponsor.

Listing sponsors play a leading role in the listing process. Their presence is supposed to bolster the confidence of investors, as they are responsible for ensuring the company meets all the criteria for its listing application and fulfills its obligation to disclose all information truthfully to the public.

As such, the case of China Galaxy Securities and Guotai Junan Securities sponsoring shows a clear conflict of interest.

In recent years, many listed companies, especially those on the ChiNext board, have been accused of exaggerating their operational capabilities in their IPO prospectuses. Many failed to achieve expected performance shortly after going public, and in some cases, sponsors have been suspected of covering up the companies' problems, especially in cases when the sponsor has an interest in the company.

Last year, Luoyang North Glass Technology Co, a Henan-based glass manufacturer, was accused of defrauding its investors as it had failed to fully disclose details of a pending lawsuit and a demand for 10.04 million pounds ($15.85 million) demanded by overseas companies.

Its sponsor, Shenzhen-based First Capital Securities Co, was also alleged of having a conflict of interest, as its second- and fourth-biggest shareholders also had holdings in North Glass, according to the Beijing-based Investor Journal.

When the sponsor can benefit from the company's listing, it is less likely it will fulfill its responsibility as a supervisor. Such conflicts of interest are more likely to happen in the case of securities firms who can act as both sponsors and the companies that wish to list.

The problem stems from a lack of clarity as to whether the co-sponsorship by China Galaxy Securities and Guotai Junan Securities is in breach of regulations.

Regulators need to close the legal loopholes that allow this kind of practice as soon as possible in order to protect investors' interests. They should make an example of China Galaxy Securities and Guotai Junan Securities by barring them from acting as co-sponsors.

The author is an economics commentator. opinion@globaltimes.com.cn