Special Compensation
Special Advance Compensation Fund for Xintai Electric’s Fraudulent Issuance
Dandong Xintai Electric Co., Ltd. (hereinafter “Xintai Electric”) was initiated an investigation by the CSRC in July 2015 for misrepresentation of relevant financial data in IPO and GEM listing application documents and misrepresentation and major omission in regular reports disclosed after the listing, and received an administrative sanction on July 5, 2016. Industrial Securities Co., Ltd. (hereinafter “Industrial Securities”), as the IPO and listing sponsor and lead underwriter for Xintai Electric, published an announcement on June 9, 2017, stating that it would set aside RMB550 million to set up the “Special Advance Compensation Fund for Xintai Electric’s Fraudulent Issuance” (hereinafter “Special Fund”) to indemnify relevant investors.
China Securities Investor Protection Fund Corporation Limited (hereinafter “SIPF”), as appointed by Industrial Securities, has acted as the administrator to deal with the management and operation of the Special Fund. Following Wanfu Biotechnology and Hirisun, this is the third time for SIPF to act as such an administrator and a further attempt to introduce diverse means for efficient and convenient dispute resolution, sound accountability mechanisms for delisting, stronger investor protection policies and improvements to the advance compensation system, and has an important meaning in protecting investors’ lawful rights and interests, enforcing civil compensation liability, promoting sustained, health and steady capital market development and pushing forward social equity and justice.
1. Overview
1.1 Background
Xintai Electric is a subsidiary of Liaoning Xintai Co., Ltd. It filed the IPO and GEM application with the CSRC in November 2011, passed the review by the GEM Issuance Examination Committee on July 3, 2012, and became listed on the GEM of Shenzhen Stock Exchange, stock code: 300372, sponsor: Industrial Securities, WEN Deyi, then Board Chairman, LIU Mingsheng, then Chief Accountant.
1.2 Factual Findings
According to the CSRC Decision of Administrative Sanction, Xintai Electric has committed the following violations:
1) Misrepresentation of relevant financial data in IPO and GEM listing application documents. This violates Article 13 and Article 20 of the Securities Law and constitutes an act of “obtaining the approval by fraud when the issuer does not satisfy the prescribed conditions” as specified in Article 189 of the Securities Law.
2) Misrepresentation and major omission in regular reports disclosed after the listing. Annual Report 2013, Semiannual Report 2014 and Annual Report 2014 contains misrepresentation and Annual Report 2014 contains major omission, and this violates Article 63 of the Securities Law, and constitutes an act of “failure of an issuer, listed company or other persons obligated to make information disclosure to disclose information as required or inclusion of any false, misleading representation or major omission in the information” as specified in Article 193 of the Securities Law.
1.3 Administrative Sanction
On July 5, 2016, the CSRC issued the Decision of Administrative Sanction (CSRC [2016] No.84) and the Decision of Market Ban (CSRC [2016] No.5) to Xintai Electric and relevant responsible persons. Pursuant to the Securities Law and other applicable regulations, the CSRC imposed the following sanction: Xintai was ordered to make rectification, warned and fined RMB8.32 million; WEN Deyi was warned and fined RMB8.92 million; and LIU Mingsheng and other relevant persons were warned and fined for an amount from RMB30,000 to RMB600,000; Moreover, WEN Deyi and LIU Mingsheng were imposed a lifetime market ban.
In addition, Industrial Securities, as the listing sponsor for Xintai Electric, also received CSRC sanction for failure of due diligence and misrepresentation in relevant documents.
1.4 Special Fund Establishment
Xintai Electric is the first stock being delisted as a result of fraudulent issuance, and unlike Wanfu Biotechnology and Hirisun, the compensation process, due to delisting, has been divided into two phases, and as a result, the Special Fund has existed for 5 months. In Phase I, centralized compensation was made available to eligible secondary market investors, including secondary market investors and eligible primary market investors that had sold out new shares of Xintai Electric subscribed by them; in Phase II, compensation was made available under any of the following three circumstances: 1) eligible primary market investors that suffered losses for still holding new shares of Xintai Electric as of the suspension of the stock of Xintai Electric, and compensation was made in accordance with new shares sold during the delisting or still retained by these investors after conclusion of the delisting; 2) eligible secondary market investors that still held shares eligible for compensation as of the suspension of the stock of Xintai Electric and made valid claims at Phase I, and additional compensation was made in accordance with the price of shares sold by these investors during the delisting or the price of delisting; or 3) eligible investors that could have filed valid claims in Phase I but failed to do so, and such investors may claim for compensation in Phase II. Specifically, in the first circumstance, eligible primary market investors, who did not sold out new shares during the delisting and so, still held new shares at the time of delisting, may choose to file a claim while retaining or without retaining new shares. If they choose to retain new shares, compensation will be made as per the difference between offering price and delisting price; and if they choose not to retain new shares, compensation will be made as per offering price (RMB8.155 per share), and in the meanwhile, eligible investors shall transfer these new shares to Industrial Securities.
Within 2 months after the Special Fund was established, as of July 28, in Phase I, a total of 11,524 eligible investors filed valid claims and reached a settlement with Industrial Securities, accounting for 94.49% of total eligible investors, and these valid claims involved RMB236,858,909, accounting for 99.18% of the total compensation.① In Phase II, the compensation covers eligible primary market investors that suffered losses for still holding new shares of Xintai Electric as of the suspension of the stock of Xintai Electric and eligible secondary market investors that still held shares eligible for compensation as of the suspension of the stock of Xintai Electric. As of October 20, a total 224 eligible investors filed valid claims and reached a settlement with Industrial Securities, involving RMB5,122,364.
Combined, as of October 20, 11,727 eligible investors lodged valid claims and reached an effective settlement with Industrial Securities, accounting for 95.16% of total eligible investors, and compensation paid to eligible investors was up to RMB241,981,273, accounting for 99.46% of the total payable compensation.②
2. Characteristics of Investor Compensation
Compared with investor compensation in the cases of Wanfu Biotechnology and Hirisun, the advance compensation has the following characteristics: firstly, the compensation scheme has to take into account delisting loss suffered by secondary market investors and new share subscription loss suffered by eligible primary market investors as well as market risk factors, and objective and impartial, it is more complicated as well. From the first announcement indicating that Industrial Securities proposed to establish a special fund (on July 9, 2016) to the formal announcement of establishment of the Special Fund, the compensation scheme had been subject to a great number of major changes. Secondly, a greater number of claims were manually submitted. When the Special Fund was established, the stock of Xintai Electric had been suspended (on August 23, 2016) for almost one year, and during this period, various special circumstances arose to make online compensation payment impossible. Thirdly, holders of multiple accounts resulted in a greater workload in respect of raw data cleaning, compensation calculation, compensation registration and allocation and examination of manual submissions, etc. Fourthly, the compensation process was divided into 2 phases. Investors’ losses were calculated as per the closing price on the trading day immediately before the suspension of the stock of Xintai Electric, and advance compensation was made to this part of losses. For investors still holding shares of Xintai Electric, upon the conclusion of the delisting, the amount of additional compensation was calculated as per actual price of sale or price of delisting. As a result, the Special Fund existed for an extended period of 5 months. Fifthly, claims were submitted in accordance with the type of loss. For those that sold out new shares subscribed at the time of IPO or eligible secondary market investors, online submission can be used; and for those that retained new shares subscribed at the time of IPO until the delisting of Xintai Electric, separated manual submission is required.
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① Total eligible investors do not include eligible primary market investors holding new shares only; total compensation does not include losses suffered by eligible primary market investors due to still holding new shares and additional compensation to eligible secondary market investors still holding shares of Xintai Electric that are eligible for compensation.
② In the total payable compensation, losses suffered by eligible primary market investors as a result of holding new shares shall mean maximal amount of compensation is available if no new shares are retained.
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