Evergrande Real Estate Group chairman Hui Ka-yan will fork out HK$1.2 billion from his own pocket to pre-listing investors after guaranteeing them a minimum return in a bid to ensure his company floated successfully last year.
A spokesman for the company yesterday confirmed that Hui had made a provision of HK$1.2 billion to pay a group of investors, including Bank of America Merrill Lynch and Chow Tai Fook Group, who injected a total of US$906 million into the company before the flotation.
Hui guaranteed to pay these investors if the average share price of Evergrande went below the HK$3.50 offer price within a year of listing, according to the prospectus.
The payment, which has been capped at HK$1.2 billion, will be made on November 5 - the first anniversary of Evergrande's listing, the spokesman said.
James Xia, Evergrande's chief executive, also told analysts and members of the media on October 11 about the provision made by Hui, the spokesman confirmed. Evergrande shares have shot up since its low in May but the average share price was HK$3.14 between November 5 last year and yesterday - significantly below the offer price.
Evergrande wanted to go public in 2008 and raise US$2.1 billion - but later aborted the plan.
When it did come to the market last year, the cash-strapped developer had to scale down the offering and collected just HK$5.65 billion.
It also received cash from various tycoons including Chinese Estates Holdings chairman Joseph Lau Luen-hung and New World Development chairman Cheng Yu-tung prior to listing. Hui told investors at the time that he was 'heartbroken' because he said Evergrande was undervalued.
The Guangdong-based developer, which claims to have the largest land bank on the mainland, borrowed heavily between 2006 and 2008 for expansion. According to its results for the six months to June 30, its total debt was 25.27 billion yuan (HK$ 29.45 billion).
The developer said it had unused bank facilities of 25.24 billion yuan and with the collectable contracted sales of 5.79 billion yuan, it had aggregate funds available of 49.52 billion yuan, which it said was adequate in terms of working capital.
Pre-IPO investments in mainland companies have thrived over the past few years and investors who inject cash into the company prior to the listing often receive a deep discount compared with investors that place orders during the IPO stage.
These private arrangements are not covered by the listing rules - as long as the investments are made either at least 28 clear days before the date of the first submission of the listing application or 180 days before the first day of trading.
Shareholder activist David Webb said the arrangement between Evergrande and the pre-IPO investors was a private one.
Additional reporting by Naomi Rovnick
Within a year of listing, the value of Evergrande's shares went below the offer price of, in Hong Kong dollars: $3.50