Source: Securities Times Author: Cheng Dan
Evergrande Real Estate has been fined for financial fraud.
On May 31, the Securities Regulatory Commission issued an administrative penalty for Evergrande Real Estate. It was discovered that Evergrande Real Estate used false financial data from the 2019 and 2020 annual reports to publicly issue 5 bonds totaling 20.8 billion yuan to qualified investors in the exchange market, and issued fraudulently. The Securities Regulatory Commission decided to order corrections, warn, and fine Evergrande Real Estate of 4.175 billion yuan for acts such as fraudulent issuance and information disclosure violations in the exchange bond market. Xu Jiayin, the chairman and actual controller of the company, who played an organizational and supervisory role, was also fined 47 million yuan and banned from entering the market for life.
The reporter learned that the Securities Regulatory Commission is actively investigating relevant intermediaries and comprehensively verifying the due diligence of the intermediaries involved in the case on the basis of investigating and punishing cases of information disclosure irregularities such as fraudulent issuance and financial fraud in accordance with the law.
Unraveling counterfeiting methods: multi-departmental cooperation to complete
The Securities Regulatory Commission found that, unlike financial fraud methods that only fictitious business and income, Evergrande Real Estate violated accounting standards, whitewashed financial statements by confirming income in advance, etc., and overdrafted future income.
Specifically, Evergrande Real Estate inflated revenue of 213.989 billion yuan in 2019, accounting for 50.14% of current revenue, and inflated profit of 40.722 billion yuan, accounting for 63.31% of total current profit; inflated revenue of 350,157 billion yuan in 2020, accounting for 78.54% of current revenue, and inflated profit of 51.289 billion yuan, accounting for 86.88% of total current profit, resulting in a total of 5 installments in the exchange market using false financial data from the 2019 and 2020 annual reports The 20.8 billion yuan bond was fraudulently issued. At the same time, the 2019 and 2020 annual reports publicly disclosed by Evergrande Real Estate as a bond issuer made false records. In addition, Evergrande Real Estate has also committed acts such as failure to disclose periodic reports as scheduled, failure to disclose major litigation and arbitration in accordance with regulations, and failure to disclose situations where maturing debts have not been settled in accordance with regulations.
The Securities Regulatory Commission discovered that Evergrande Real Estate's financial fraud was carried out by the company's relevant functional departments in cooperation with the company headquarters and the project company, and used methods such as revising and adjusting the current year's handover list and revising the Mingyuan System's handover time to fabricate important facts, covering a wide range of areas and involving a large amount of fraud.
Fines landed: A fine of 4 billion dollars against bond issuance Xu Jiayin was banned from the market
The Securities Regulatory Commission said that Evergrande Real Estate covered up the company's actual financial situation through whitewashed statements. As a bond issuer, it disclosed false information to investors or did not disclose information in accordance with regulations. The amount of money involved in the case was huge and the methods were poor, causing serious consequences of defaulting on the existing bond issuance.
The Securities Regulatory Commission decided to order corrections, give warnings, and fine Evergrande Real Estate of 4.175 billion yuan. Among them, fraudulent issuance was penalized in accordance with 20% of the funds raised, or 4.16 billion yuan. The maximum penalty ratio for the application of the new Securities Law by the Securities Regulatory Commission to handle fraudulent issuance was imposed in the same proportion as the fraudulent issuance of Zeda Yisheng shares and the fraudulent issuance of Qixin shares. Compared with the 2005 revisions and 2014 amendments to the Securities Law, the proportion of “imposing a fine of 1% or more of the amount of illegally raised funds” was greatly increased; the maximum fine of 10 million yuan was imposed for false records in the 2019 and 2020 annual reports; A maximum fine of 5 million yuan was imposed for failure to disclose information in accordance with regulations.
At the same time, Xu Jiayin, the chairman and actual controller of the company, who played an organizational and supervisory role, was fined 47 million yuan and banned from entering the market for life.
The reporter learned that the 47 million fine involved multiple maximum fines for acts such as fraudulent issuance and failure to disclose information in accordance with regulations, making full use of the maximum capital penalties and market ban eligibility penalties within the scope of the new Securities Law, with the intention of removing the “bad guys” from the capital market. The Securities Regulatory Commission imposed fines and imposed market entry measures on the other persons responsible for Evergrande Real Estate according to their position and level of participation. The “critical minority” responsible for financial fraud were severely punished.
The landing of Evergrande Real Estate's fine does not mean the end of Evergrande Group's risky matters
It is worth noting that the above penalties only concern the misrepresentation and fraudulent issuance of Evergrande Real Estate in the exchange bond market; they do not involve risk matters in other sectors of the Evergrande Group.
Evergrande Real Estate cannot be directly equated with Evergrande Group. According to public information, China Evergrande Group (Hong Kong listed company) indirectly holds 61.25% of Evergrande Real Estate's shares. In addition to Evergrande Real Estate, Evergrande Group is involved in a number of businesses, including Evergrande Auto, Evergrande Property, Evergrande Wealth, Evergrande Life Insurance, Hengteng Network, Motorhome Treasure, Evergrande Children's World (formerly known as Evergrande Travel), Evergrande Health, Evergrande Hi-Tech, Evergrande Ice Spring, and other businesses. The above businesses are all handled by different independent business entities, and are directly or indirectly owned by China Evergrande Group. Among them, businesses such as Evergrande Auto, Motorhome Bao, Hengteng Network, and Evergrande Hi-Tech are all Evergrande's diversification experiments after the 2016 deleveraging policy.
Specifically, Evergrande Real Estate bonds account for a relatively low share of Evergrande Group's total liabilities. According to the 2023 interim report of China Evergrande Group (03333.HK), as of June 30, 2023, China Evergrande Group's total debt was 2388.2 billion yuan, or 1784.22 billion yuan after excluding contract liabilities, including 624.77 billion yuan in loans, 1056.57 billion yuan in trade and other accounts payable, and 102.88 billion yuan in other liabilities.
According to Evergrande Real Estate's 2023 semi-annual report, as of June 30, 2023, Evergrande Real Estate's total debt was 1769.4 billion yuan, including interest-bearing debt of 442,754 billion yuan.
Industry insiders pointed out that the size of corporate bonds issued by Evergrande Real Estate on the exchange market is about 53.5 billion yuan, accounting for about 2% of Evergrande Group's total debt and 12.09% of Evergrande Properties' interest-bearing debt, which is relatively low compared to Evergrande Group's total risk scale. For a total of 20.8 billion yuan of bonds involving fraudulent issuance, the Securities Regulatory Commission imposed penalties according to 20% of the funds raised. It not only severely punishes vicious fraudulent issuance, but also fully takes into account the scale of Evergrande Real Estate bonds and global efforts such as the “housing guarantee” campaign, showing the determination of the Securities Regulatory Commission to resolutely rule the market according to law, strictly supervise, and protect the legitimate rights and interests of investors.
Intermediary agency investigations are still ongoing
In the Evergrande Real Estate case, a number of intermediaries were involved, including CITIC Construction Investment, China Chengxin International, PricewaterhouseCoopers, and King & Wood Mallesons. The reporter learned that the Securities Regulatory Commission is actively investigating the relevant intermediaries and will announce the investigation results after the investigation is completed.
In the previous “Wuyang Bond Case,” the country's first fraudulent issuance case of corporate bonds. As the lead underwriter and bond trustee for the bonds issued by Wuyang Construction, Debon Securities once “stepped on lightning” in this case and fell into a quagmire of compensation and litigation disputes. Debon Securities was ordered by the Securities Regulatory Commission to make corrections, give a warning, seize the illegal proceeds of 18.57 million yuan, and be fined 550,000 yuan, for a total of 19.124,400 yuan; while those responsible for the project, Zhou Chengwei and Cao Rong, were warned and fined 250,000 yuan each to revoke their eligibility to practice securities. However, this penalty was the highest penalty from the Securities Regulatory Commission at the time. In the subsequent judicial ruling, in addition to the issuer “Wuyang Construction” being liable, none of the intermediaries involved in the issuance of “Wuyang Bonds”, including brokerage firms, law firms, accounting firms, rating agencies, etc. were spared and assumed corresponding responsibilities.
As an important channel for direct corporate financing, the exchange bond market plays an important role in reducing corporate financing costs, improving financing efficiency, and strengthening market constraints.
Relevant sources from the Securities Regulatory Commission said that while enjoying the convenience of financing, bond issuers should fear the rule of law and effectively enhance market awareness, rule of law awareness, and investor protection. Illegal acts that maliciously damage investors' rights and interests, such as financial fraud and misrepresentation, will surely be severely punished by law. The Securities Regulatory Commission will continue to strictly crack down on illegal securities and futures activities in accordance with the law, take comprehensive measures in terms of improving detection capabilities, improving working mechanisms, strengthening accountability, and highlighting the combination of prevention, etc., continuously eradicate the breeding ground for fraud, and resolutely implement “prickly teeth” in supervision and enforcement, and be angular to effectively maintain the foundation of market integrity and protect the legitimate rights and interests of investors.
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