2016–2019 financial scandal
In 2019 Kangmei became involved in a scandal relating to its financial reports. The Financial Times called the incident "one of China's biggest accounting scandals in recent memory", while the South China Morning Post said it was "one of China's largest financial frauds".[6] According to the China Securities Regulatory Commission (CSRC), the company overstated its revenue by 29 billion RMB, overstated its profits by 4.1 billion RMB, and overstated its cash holdings by 88.7 billion RMB.[6] The incident led to concerns about China's reputation among international investors as well as questions about the adequacy of the country's financial regulation.[7]
In late 2018, Kangmei Pharmaceutical announced that it was under investigation for possible disclosure violations.[8] The CSRC noticed that the company was earning unusually little interest on its reported cash holdings,[9] and on 29 April 2019, the company announced that its 2017 annual report had overstated the company's cash holdings by 29.9 billion RMB.[10] The company also revised its 2017 operating revenue to 8.9 billion RMB less than previously reported.[8] Following the announcement, Kangmei's shares on the Shanghai Stock Exchange fell by 10%, and trading was halted as they reached the maximum daily price move.[8]
The company initially said that the incorrect disclosure was due to an "accounting error".[8][11] On 29 May 2019 it said that faked documents were involved; this announcement caused its stock price to fall by the maximum daily price move again (at this time the limit was 5%, as the company had been moved to risk-alert status by the exchange).[6] By this point its shares had dropped by more than 60% since the accounting problems were first disclosed.[12]
On 17 May 2019, the CSRC's preliminary investigation found that the 2017 financial report was materially false;[13] the company was to be placed under Special Treatment (stock market) (a formal warning that its stock could be delisted) on 21 May. On 16 August, the Securities Regulatory Commission completed its investigation, saying that Kangmei Pharmaceutical had committed "premeditated and malicious cheating of investors", and imposed administrative penalties on the company and 22 individuals as well as banning six parties from accessing the securities market.[14][15][16][6] Earlier in the year, the company had been fined 600,000 RMB, and several employees were fined amounts ranging from 100,000 to 900,000 RMB.[17] The penalties were described as "a slap-on-the-wrist fine" in the South China Morning Post, and Kangmei's share prices rose by 17.3% over the next week, hitting the maximum daily limit of 5% four times along the way.[6]
At the time of the scandal, Kangmei Pharmaceutical was included in MSCI's emerging markets index. The incident drew attention to the risks foreign investors might face when investing in funds that track the index, especially given the increasing weighting of Chinese companies in the index.[8][12] Following the incident, MSCI removed Kangmei Pharmaceutical from the index in June 2019.[18][19]
Additional penalties and litigation followed. In July 2020, Kangmei's actual controller Ma Xingtian was detained by police in connection with the fraud;[20] in November 2021 he was sentenced to 12 years in prison and fined ¥1.2 million.[21] Also in July 2020, the CSRC temporarily banned GF Securities, which sponsored Kangmei's IPO, from sponsorship and bond underwriting due to its role in the scandal.[7][22] On 16 April 2021, the government-affiliated China Securities Investor Service Center sued Kangmei Pharmaceutical for financial fraud in a class-action lawsuit on behalf of more than 50 investors.[23][24][25]
