China Solar Energy Says Directors Detained Amid Fraud Probe

China Solar Energy Says Directors Detained Amid Fraud Probe

China Solar Energy Holdings Ltd. (155), a Hong Kong-based solar panel maker, said its chairman and two directors have been detained by Chinese authorities on allegations of fraud involving the assets of a mainland unit. Chairman Yeung Ngo, Yang Yuchun and non-executive director Hao Guojun were arrested and have been held since Aug. 26, according to the company’s legal advisers, and can’t be contacted, China Solar Energy said in a statement to the Hong Kong stock exchange on Oct. 18. The company is still trying to assess the impact of the investigation on its financial performance and its shares, which were halted on Aug. 16, will remain suspended, it said.The disappearance of China Solar Energy’s directors and the fraud probe underscore investor concerns that the business environment on the mainland lacks transparency and is prone to corruption. Transparency International last week ranked Chinese firms lowest in a survey of public reporting practices in emerging markets, while short-sellers have targeted companies including Prince Frog International Holdings Ltd. (1259) and China Minzhong Food Corp.

“Chinese companies have been seen as having relatively weak corporate governance. This is the reason why valuations of Chinese stocks are lower,” Lewis Wan, Hong Kong-based chief investment officer at Pride Investments Group Ltd., said by phone yesterday. “The penalty on the mainland isn’t harsh enough to stop executives from committing frauds. The situation should improve though as China Securities Regulatory Commission has been keen to clear frauds in the nation.”

China Solar Energy fell 11 percent to HK$0.18 on Aug. 16 before the company asked for the shares to be suspended pending the release of an announcement about recent movement in the price. The company’s market value was HK$277 million ($36 million).

Domestic Demand

The government in China, the world’s biggest maker of solar panels, announced measures in June to boost domestic demand for solar-generated electricity and provide easier financing to manufacturers to help ease a glut that’s made the industry unprofitable. The State Council also said it will encourage mergers and acquisitions and curb blind expansion in the sector.

Yeung Ngo, whose age was given as 62 in the annual report and accounts released July 30, joined the company in March 2011 and is the father of Yang Yuchun, according to the report. Yeung’s stake in the company fell to 14.6 percent in August from 15.8 percent after the company raised about HK$20.2 million in a private placement, according to an Aug. 13 filing.

Duties Suspended

Hao Guojun, whose age was given as 55, became a non-executive director in January 2013 and joined a unit named as Dali Stream Solar Energy in 2008 as assistant chief engineer, according to his biography in the annual report.

The directors’ duties and functions have been suspended, although that won’t affect daily operations, China Solar Energy said in its statement. Two calls to the company’s offices in Hong Kong yesterday outside normal business hours were not answered.

Based on investigations into allegations made to the Hong Kong stock exchange against the company, one subsidiary in Changzhou had failed to pay a reported increase in its registered capital with the local authority by the due date, according to the statement.

The Dali Stream Solar unit, had failed to pay up its registered capital of $49.5 million, according to the statement. Its assets were frozen and documents were seized by the Dali public security bureau as part of a probe into a suspected false reporting of registered capital involving Yeung and Yang, the company said.

Lowest Ranking

Both units risk having their business licenses revoked, according to the statement.

In Transparency International’s report of 100 multinationals released Oct. 17, the 33 Chinese companies surveyed averaged a score of 2 out of 10 points. Eight of the 10 lowest ranking companies on the list were Chinese, including China National Chemical Corp. and China Shipbuilding Industry Corp.

Short-seller Glaucus Research Group has targeted Chinese companies this year, most recently Fujian province-based Prince Frog, a seller of adult care products and children’s care products including diapers. Trading in the shares was halted in Hong Kong on Oct. 16 after they plunged the most since listing in July 2011 after Glaucus questioned the company’s sales.

The short-seller, which has an office in Newport Beach, California, also targeted Minzhong Food, based in Putian, Fujian province. The Singapore-listed stock lost half its market value in less than two hours on Aug. 26 after Glaucus questioned the vegetable processor’s accounts. PT Indofood Sukses Makmur offered to buy the outstanding shares in the company it didn’t already own the following month.

To contact the reporter on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net