A COURT in eastern China ruled that a domestic ratings firm should help compensate some creditors for a construction firm’s 1.4 billion yuan (US$216 million) bond defaults three years ago, a first in the country as the government raises pressure on agencies to improve their due diligence.

Dagong Global Credit Rating Co. is responsible for repaying up to 10 percent of at least 494 million yuan (US$76.32 million) in combined debt claims to more than 400 individual bondholders of Wuyang Construction Group Co., according to a ruling by Hangzhou Intermediate People’s Court dated Thursday.

Wuyang Construction’s legal representative and actual controller Chen Zhizhang, underwriter Tebon Securities Co., as well as an accounting company and a legal firm are also collectively responsible, the court said, citing their failures to conduct due diligence properly.

China has tightened oversight of the country’s bond market following a surge of defaults since November, imposing short-term bans on new business on two other rating agencies and launching probes into several banks, accounting firms and a large brokerage for alleged irregularities related to bond sales.

The Hangzhou court’s ruling also sets the precedent for bond underwriters, accounting and law firms to be financially responsible for bondholders’ losses, potentially offering a new roadmap for handling such cases in the future.

“This verdict should be the first of its kind in China. It substantially raises the cost of fraudulence and inadequate due diligence in the bond market,” said Yang Hao, a fixed income analyst at Nanjing Securities Co.

“Financial intermediaries will become more prudent in the future and investors may also actively explore this approach to seeking compensation.”

Wuyang Construction defaulted on two onshore bonds totaling nearly 1.4 billion yuan in 2017 and was later alleged by China’s securities regulator of falsifying financial documents to win regulatory approval to sell bonds.

In November 2019, the securities regulator fined Tebon Securities for violating rules when it was an underwriter in Wuyang’s 2015 bond sale.(SD-Agencies)