GCL has no record of performing due diligence on lender which walked away with $120m of its stock

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Chinese polysilicon manufacturer GCL-Poly has revealed the name of the general manager who signed off a controversial RMB510 million (US$79.9 million) pre-payment it made in 2019 for factory which never took shape, and also announced it has no record of performing any background checks on a finance company which last year walked away with US$120 million worth of its shares.

GCL was making the announcements as it tried to draw a line under a pair of incidents which have seen trading in its stock suspended on the Hong Kong exchange since April 1.

The company had originally opened up in May about a deal it signed in August 2018 which involved pledging 865 million shares in its GCL New Energy solar project development business as security in return for a promised US$60 million loan from Bentley Rothschild Capital 5 Ltd, of which GCL said only US$2.2 million ever arrived, in February last year.

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GCL discovered in May the stock, which had been held by a third-party broker under the terms of the arrangement, had been transferred to Bentley Rothschild after the latter claimed the terms of the loan agreement had been breached. Earlier this month, GCL said a key individual associated with Bentley Rothschild had been accused of fraudulent activity by other companies which had received similar treatment.

The solar manufacturer's bid to resume trading in its stock involved appointing an independent investigation into its internal policies and Crowe (HK) Risk Advisory Ltd, the business selected by GCL to examine its practices, found the solar company could produce no evidence of having carried out any due diligence on Bentley Rothschild or the unnamed broker involved in the loss of stock which, pv magazine has previously reported, left the parent with only a 49.24% holding in its New Energy business.

Findings

The findings of the internal report, published by GCL in an update to the Hong Kong exchange yesterday, recommended any future such deals not involve any pledge of company shares and that such financing deals be approved by both the GCL-Poly board and external legal counsel.

In a series of updates yesterday – which included full-year figures for last year and an update from the first half of this year – GCL named Jiang Wenwu as the man responsible for a controversial RMB510 million pre-payment to state-owned energy construction business Sinomec Refinery & Chemical Corp as part of an engineering, procurement and construction (EPC) contract related to a planned RMB1.9 billion (US$297 million) polysilicon fab in Jiangsu Xuzhou Economic and Technological Development Zone, which is yet to begin.

Jiang was a former executive director of GCL and was general manager of the business' Jiangsu Zhongneng Polysilicon Technology Development Co Ltd subsidiary, and signed off the pre-payment despite only having authorization, under GCL internal policy, to approve up to RMB100 million (US$15.7 million) of capital spending.

The emergence of the pre-payment in relation to an EPC contract which was dissolved in April this year – with Sinomec refunding RMB495.28 million (US$77.55 million), minus its project planning expenses – prompted GCL auditor Deloitte Touche Tohmatsu to refuse to sign off the company's 2020 accounts and to walk away from the business. The lack of full-year figures, until yesterday, prompted the suspension of trading in GCL stock.

The pre-payment

Yesterday's updates named Sinomec as lead contractor on the planned poly fab for the first time, along with sub-contractor Shanghai Chuanghong Technology Co Ltd. GCL reiterated it had decided to end the deal with the two entities to instead tender multiple EPC businesses to construct different parts of the planned 54,000-ton annual capacity poly factory, in order to protect the confidentiality of its granular silicon production technology. The manufacturer said it was still searching for replacement EPCs and would update shareholders on the contract this year.

The signing of the former EPC deal, and payment of the contentious RMB510 million, was not reported by the company as a major transaction at the time, in September 2019, as required by the Hong Kong exchange, and the investigation by Crowe Risk Advisory found Wenwu had only informed GCL chairman, Zhu Gongshan, and CEO, Zhu Zhanjun, about the contract “some time around the end of November 2019 or the beginning of December 2019.”

In a report which flagged up four internal control deficiencies of a “high-risk nature” – two associated with “procurement and construction projects and [the] handling of trade payables”; and two concerned with “funding, cash and financing management,” Crowe found GCL had permitted deals to be signed off solely on paper in cases where urgency was required. The investigator, who said yesterday the GCL board had remedied all of the 19 deficiencies it identified, recommended all such deals be required to go through the company's electronic systems in future.

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