Caixin
Aug 03, 2021 03:56 AM
FINANCE

Yongcheng Coal and Executives Fined $820,000 for Fraud

Yongcheng Coal and Electricity’s November default on 1 billion yuan of bonds rattled the bond market.
Yongcheng Coal and Electricity’s November default on 1 billion yuan of bonds rattled the bond market.

Yongcheng Coal and Electricity Holding Group Co. Ltd. and its executives were fined 5.3 million yuan ($820,000) for financial fraud after the coal producer’s high-profile default last year rattled the bond market and shook investors’ confidence in state-owned companies.

Yongcheng Coal received an administrative penalty from the China Securities Regulatory Commission (CSRC) July 27 over disclosure violations including inflating funds in its financial statements by 86.1 billion yuan ($13.3 billion).

The state-owned company received a warning from the regulator and was fined 3 million yuan, and six executives were penalized a total of 2.3 million yuan, the company said in a filing with Shanghai Clearing House.

In November, Yongcheng Coal defaulted a 1 billion yuan ultra-short-term bond, surprising the market as the company had the highest possible credit rating and its financial statements showed that it had more than 32.8 billion yuan of cash and cash equivalents as of September. The default set off a chain reaction in the bond market, triggering a sell-off of other state-owned issuers’ bonds and cancellation of new offerings.

The CSRC found in an investigation that from January 2018 to October 2020, Yongcheng Coal in its bond issuance prospectuses and regulatory filings listed receivables from its controlling shareholder Henan Energy and Chemical Industry Group Co. Ltd. as its own funds, inflating its cash by more than 50%, according to the filing.

Since its inception in 2007, Yongcheng Coal’s funds have been automatically placed in a custody account managed by a financial unit of Henan Energy and Chemical. Unlike its own cash, bank deposits and other funds that can be withdrawn at any time, money in the financial unit’s account is controlled by Henan Energy and can be used by Yongcheng only with approval. The funds have in fact been used by Henan Energy for other projects, the CSRC found.

In recent years, Henan Energy, the largest state-owned company by assets in Henan province, has expanded its business from coal and chemicals into many fields such as trade, logistics and finance with 34 subsidiaries. Most of them are money-losing except the coal business. The parent company has been regularly transferring funds from the unit’s accounts, and it’s up to the parent company how Yongcheng uses its cash and whether it can repay bonds.

Yongcheng made fraudulent statements about the restricted funds and failed to disclose an equity pledge in its prospectuses for some debt issuance, the CSRC said.

Former Yongcheng Coal chairmen Qiang Daimin and Hou Shining were supervisors directly responsible for the fraud, and former and current chief accountants and general managers were also taken accountable, the CSRC found.

In January, Yongcheng was barred from debt sales for a year by China’s interbank bond market regulator. The parent was banned from debt offerings for seven months. The credit rating firm that gave it highest rating, its auditor and several brokerages that underwrote its bond issuances were also issued warnings for their role in the Yongcheng default.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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