Two promising startup companies in China have been barred from listing their shares on the country's NASDAQ-style tech innovation board for allegedly misleading shareholders. The punishment sent the two companies' listed shares in Shanghai plummeting.
Share prices of both Zhejiang Hangke Technology and Ningbo Ronbay New Energy Technology dropped by around 16 percent this week following news that they were being punished for not fully disclosing transactions to shareholders. The sanction essentially barred the two companies from listing their shares on China's Star Market to raise funds for the next 12 months.
The sanction is the first of its kind ever imposed on a Chinese firm by the stock market operator. Analysts at Northeast Securities have pointed out that it is sending a clear message to all businesses to properly disclose their financial transactions.
The China Securities and Regulatory Commission imposed the sanctions on the two companies late last week. The CSRC revealed that Ningbo Ronbay did not disclose that it was not able to collect more than $28 million that was due to it from its customer BAK Power Battery back in November last year. During that time the company stated that it was considering writing off the uncollected amount.
Meanwhile, the CSRC slapped the same sanction on Zhejiang Hangke for failing to disclose a transaction also made with BAK Power Battery. Zhejiang reportedly did not disclose that it had terminated a contract with the company after it failed to collect around 117 million yuan in receivables from the firm. It was also accused of misstating the proportion of advanced payments it had received.
Less than a year since the launch of the NASDAQ-style tech innovation board, China is now taking a much tougher stance against companies failing to disclose truthful financial reports. The Star Market is known for having a much simpler vetting process compared to the other equities markets, having listed more than 96 startups since its debut back in July.
Before, regulators typically slap companies that fail to properly report transactions with a fine. This time, the punishment is much harsher and will likely have long-term ramifications for the businesses involved. The imposed punishment has been seen by some as a clear indication that China is taking the law seriously and will do everything it can to protect equities markets such as the Star Market as they continue to grow.
The tougher stance against financial reporting fraud comes as Chinese companies face strict scrutiny from overseas regulators following the Luckin Coffee scandal. The US-listed Chinese coffee chain operator was caught misreporting its finances resulting in its share prices plummeting to record lows.
