Property Development Giant Evergrande Fined for Financial Fraud

(TMTPOST)— A large-lettered slogan -- “New Evergrande” -- is placed on the official website of property development giant China Evergrande as the company is trying to sever itself from its founder Hui Ka Yan, also known as Xu Jiayin.

The company, mired in large debts, has been fined 4.175 billion yuan by China's top securities regulator, the China Securities Regulatory Commission (CSRC). The founder was barred from participating in the securities market for the rest of his lifetime.

He was also penalized by a fine of 47 million yuan ($6.53 million) for his involvement in serious financial fraud, according to a filing of Evergrande Real Estate Group on Monday night.

This stringent penalty is part of China's concerted efforts to tighten oversight of the capital market, demonstrating the country's resolve to ensure stability within the financial sector, experts noted.

The CSRC has accused Hui of orchestrating and organizing financial fraud using malicious methods, resulting in a devastating consequence. Alongside Hui, Xia Haijun, former vice chairman of China Evergrande Group, faces a 15 million yuan fine and a lifetime ban from the securities market. Evergrande Real Estate itself has been fined 4.175 billion yuan ($580 million) and ordered to rectify its practices.

The CSRC's investigation has identified three key areas of suspected illegal activities involving Hui, Evergrande Real Estate, and other senior executives. These include the inflation of revenue figures in the company's annual reports for 2019 and 2020, amounting to 564 billion yuan.

In the wake of these findings, the CSRC has highlighted Hui's direct involvement in overseeing all aspects of Evergrande Real Estate's operations under his management. He allegedly instructed others to manipulate the company's financial performance in the annual reports using egregious methods, therefore he was held directly accountable for the misconduct.

Moreover, the CSRC suspects fraudulent activities in Evergrande Real Estate's public issuance of corporate bonds in 2020 and 2021 by using falsified data. Additionally, the company failed to promptly disclose crucial information, such as its 2021 and 2022 annual reports, major litigation and arbitration cases, and defaults on maturing debts.

Evergrande Real Estate has expressed its intention to closely monitor developments regarding these matters. Furthermore, the company has waived its right to present a defense or request hearings in response to the imposed penalties.

Hui was placed under compulsory measures in September, marking an escalation in regulatory actions against him and the former management of Evergrande. Legal experts suggest that the fines imposed by the CSRC are unlikely to impact creditor debt repayment, as compensatory debts take precedence over punitive debts in repayment order. However, in the event of financial insolvency, measures such as asset seizure and attachment may be pursued to recover funds.

This latest move by regulatory authorities represents a severe punitive measure against Hui and former Evergrande executives following earlier actions. Analysts interpret this development as indicative of a broader crackdown on regulatory violations within the Evergrande Group, with potential further penalties anticipated. Importantly, the CSRC's penalties are unlikely to preclude criminal liability proceedings.

Evergrande Real Estate has reiterated its commitment to monitoring developments closely, while affirming its decision to forego defense proceedings, and hearings regarding the imposed penalties. The final administrative fines and market bans will be based on formal decisions issued by the CSRC.

In a separate development, the CSRC released four policy documents on Friday aimed at enhancing supervision and risk management in the capital market, signaling its determination to foster high-quality growth in the stock market.

Beyond concerns of financial misconduct, Evergrande's staggering debt levels have triggered a cascade of repercussions. SKSHU Paint Co., Ltd. recently initiated legal action against four entities within the Evergrande ecosystem, seeking approximately 190 million yuan in damages.

In a related incident in June 2021, SKSHU Paint disclosed the rejection of commercial acceptance bills issued by Evergrande-related entities held by its subsidiary. Despite negotiations with Evergrande, the promised "property-for-debt" arrangement failed to materialize fully, resulting in unresolved debts and property-related issues.

Similar cases abound, as evidenced by Evergrande's disclosure of 2,073 pending litigation cases with outstanding amounts exceeding 30 million yuan each, totaling approximately 502.596 billion yuan as of December 2023. Unpaid matured debts and overdue commercial bills surpass 500 billion yuan, underlining the gravity of the financial challenges facing the company.

(1 yuan equals US$ 0.14)