Vanke Asks CSRC to Investigate Baoneng on Alleged Misconduct

  • Files letter with CSRC, bourse, claiming alleged illegal acts
  • AMPs set up by Baoneng violated rules, Vanke says in letter

China Vanke Co., the nation’s largest publicly traded developer, asked the Chinese stock regulator to investigate its largest shareholder for alleged misconduct and illegal acts, escalating a tussle for control.

The Shenzhen-based developer on Monday filed a letter with the China Securities Regulatory Commission and the Shenzhen Stock Exchange, asking them to investigate Baoneng Group’s Shenzhen Jushenghua Co. unit for alleged illegal acts and insufficient disclosure, according to a copy of the letter obtained by Bloomberg News, which was confirmed by the firm.

Jushenghua, a unit of Vanke’s largest holder Baoneng, set up nine asset-management plans, or AMPs, to build up stakes in the company in an attempted "takeover," according to the letter. Vanke said it’s “illegal” for Jushenghua to finance through these vehicles, which came under regulatory scrutiny last year, as they don’t qualify to be registered as shareholders under Chinese laws.

Among the estimated 43 billion yuan ($6.4 billion) funds Baoneng used to purchase Vanke stakes, about 26 billion yuan was lent by six banks through the AMPs, a type of shadow-banking arrangement that is used for stock purchase in China, JPMorgan Chase & Co. analysts led by Katherine Lei wrote in a July 12 note.

Ownership Tussle

Vanke, China’s largest residential developer by sales, has been embroiled in a tussle for control since last year, when Baoneng, until then an obscure conglomerate, displaced China Resources (Holdings) Co. as the developer’s largest stakeholder. At the time, Vanke’s management labeled it a “hostile takeover,” and later formed a share sale plan that was widely viewed by analysts as a way to dilute Baoneng’s ownership.

The developer also said in the letter that Baoneng doesn’t have the right to vote before the alleged breaches are corrected. If Baoneng can vote as a shareholder, Vanke’s $6.9 billion share sale to tie up with a metro operator faces almost-certain rejection in its current form. Baoneng and China Resources, which together hold more than 40 percent of Vanke stakes, said they’ll oppose the deal.

Baoneng has boosted its stakes in Vanke to 25.4 percent of total shares, Vanke said in the letter.

Liquidity Squeeze

The Shenzhen-traded Vanke shares have fallen below the level that JPMorgan analysts said might trigger a liquidity squeeze at the AMPs managed by Baoneng. Vanke shares rose 0.9 percent to 17.27 yuan as of 11:33 a.m. on Wednesday, after four straight days of declines. The shares have tumbled 29 percent since they resumed trading on July 4 following a six-month halt.

The plunge in share price may trigger a forced liquidation of the funds Baoneng set up with borrowed cash from banks to build up its stakes in Vanke, JPMorgan analysts wrote. According to industry practice, if a stock’s drop hits a stop-loss level leading to a 20 percent decline in the fund’s net asset value, Baoneng would need to inject more cash into it, otherwise senior investors such as the banks can liquidate the fund to limit their losses, according to JPMorgan analysts.

Jushenghua’s disclosure omissions misled investors and the public, Vanke said in the letter. A phone call to Jushenghua public relations department wasn’t immediately answered.

— With assistance by Emma Dong

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