South Korea`s tobacco monopoly KT&G Corp. shares fell sharply Wednesday after it was warned of a punitive action from financial regulators over alleged intentional accounting misstatements tied to its investment into an Indonesian tobacco firm.

According to a government official on Tuesday, the Financial Supervisory Service (FSS) recently completed inspections into KT&G and issued a pre-disciplinary notice regarding the firm’s accounting practice for its Indonesian entity Renzoluc (Trisakti) acquired in 2011.

KT&G purchased 100 percent ownership of Renzoluc, a special purpose company that controls local tobacco manufacturer Trisakti. Since then, KT&G had injected an additional 200 billion won ($16.8 million) into Trisakti, but the subsidiary continued to lose money.

KT&G has been suspected that it acquired the firm due to political pressure after then-President Lee Myung-bak’s visit to Indonesia and cooked its book to hide losses. The FSS launched inspections into KT&G in late 2017 and recently drew a conclusion to support the allegations.

The FSS is likely to finalize disciplinary action against KT&G in May or June.

If the allegations are proven, KT&G could face a criminal charge and delisting from the stock market. Under the current Korea Exchange rules, companies that violate major accounting standards are subject to stock trade suspension and a delisting review.

KT&G shares fell 4 percent to close Wednesday at 81,500 won despite the benchmark Kospi gain of 2.24 percent.

An FSS official said a preliminary measure was communicated to KT&G based on the inspection result, but specific content or the level of punishment cannot be confirmed, adding the FSS notice will be finalized during its inspection committee and securities and futures commission meetings where the level of punishment will also be determined.

In response, KT&G said the financial authorities have some misunderstandings on certain facts and these will be clarified during a future review process.

By Jin Young-tae and Minu Kim

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