China: More Transparency- New Enterprise Information Disclosure Rules Take Effect

China has recently passed new laws requiring enterprises to disclose important information which the public can access. On October 1, 2014, new rules came into effect, Provisional Rules on Enterprise Information Disclosure (业信息公示暂行条例 ) ("Enterprise Information Disclosure Rules").  One reason behind this new legislation is China's desire to establish a national credit system founded upon transparency of information relating to registered enterprises.  A national credit system will allow the public to access and rely upon important enterprise information when making investment decisions.

Another reason for the new legislation is that it falls within China's plans to reform its company registration system. Under the Enterprise Information Disclosure Rules, the establishment of an annual reporting system will replace the time-consuming and costly annual inspection, examination and approval system.

Disclosure of Enterprise Information

The burden of making enterprise disclose largely rests upon the enterprises.  But, the new regulations also place obligations on the AIC and other government units to disclose enterprise information. The following describes the various obligations of these parties to make disclosures of relevant enterprise information.

I.  Enterprises – Disclosure of Enterprise Information

These new regulations require enterprises registered in China to submit annual reports detailing their basic operations as well as providing real-time notification of significant operational changes. With these new changes, enterprises are no longer required to submit to an annual governmental examination review and approval process.

What information must enterprises disclose?

A.  Annual Report Requirement

The Enterprise Information Disclosure Rules require enterprises to submit an annual report of the prior year's activity to the Administration for Industry and Commerce ("AIC").  The information disclosed in the annual report is intended to reflect the basic operating conditions of an enterprise. The submission of an annual report abolishes the previous requirement that an enterprise pass an annual inspection and examination and obtain government pre- approval.  Also, enterprises are no longer required to submit annual audited financial statements.

Enterprises must disclose the following information in their annual report:

  1. Contact information, including address, telephone number, email and other contact information.
  2. Operational status, including business commencement, discontinuation and liquidation of enterprise and other information concerning the existence of the enterprise.
  3. Enterprise information concerning its investment in the formation of any other enterprise and equity purchase.
  4. Where the enterprise is a limited liability company or a joint stock limited company, the subscription and paid up capital contributions – amounts, time and form of capital subscribed to and paid up contributions by shareholders or sponsors.
  5. Equity transfer or other equity change information.
  6. Company website information

Additionally, enterprises may report, but are not required to disclose, information concerning the number of employees, total assets, total liabilities, total owners' equity, gross operating income, total net profits, net margins and total tax payments.

B.  Real-Time Disclosure of Significant Activity or Material Changes – 20 Working Day Rule

Significant enterprise activity or material changes which might be critical for investors to know, but which would not otherwise be disclosed until next year's annual report, is required for disclosure on a real-time basis.  The Enterprise Information Disclosure Rules require enterprises to submit within 20 working days of the occurrence of the following:

  1. Capital contribution – amounts, time and forms subscribed to and paid by a shareholder
  2. Equity transfer by any shareholder or other information about other equity changes
  3. Granting, modification and renewal of administrative licenses
  4. Intellectual property right pledge registration information
  5. Administrative punishment information
  6. Other information that should be disclosed in accordance with the law.

II.  AIC- Disclosure of Enterprise Information

The AIC is also placed under an obligation to disclose enterprise information which it obtains through the performance of its duties.  The disclosure is to be made available to public through this new enterprise credit information credit system within 20 business days from the date from the generation of such information. The AIC shall disclose the following enterprise information:

  1. Registration and record-filing information;
  2. Chattel mortgage registration information;
  3. Equity pledge registration information;
  4. Administrative penalties;
  5. Other information required to be disclosed to the public pursuant to law.

III.  Other Government Departments- Disclosure of Enterprise Information

Government departments, other than the AIC, are required to publicly disclose enterprise information.  The enterprise information required for disclosure include the following:

  1. Information concerning the granting, modification or extension of administrative permits;
  2. Information concerning administrative penalties; and
  3. Other information required to be made public according to the law.

These government departments are authorized to make disclosure either through this new enterprise credit information system or through other systems. It is unclear how the disclosed information, if made public through other systems, will be disclosed publicly in the new credit enterprise disclosure system.

IV.  Failure to Disclose Annual Report; Failure to Disclose Relevant Information within Time Limits Ordered; Disclosure of False Information or Concealment of Facts

If an enterprise has failed to disclose its annual report, failed to disclose relevant enterprise information within the time limits ordered for disclosure, or has concealed facts or disclosed false information, the AIC can place the enterprise on a public list of enterprises which are reported as having abnormalities.  The list is made public through the enterprise credit information disclosure system. If the enterprise fails to perform its obligations to make disclosure within 3 years, the AIC can place the enterprise on a list of enterprises that will be considered as having seriously violated the law. These lists, too, are to be made available to the public through the enterprise credit information disclosure system. These measures affect an enterprise's credit facilities as well as restrict or bar an enterprise from procuring government contracts.

An enterprise can also be subject to liability and ordered to pay compensation to other persons for losses created by its failure to disclose enterprise information here or by providing false information or concealing facts.

V.  False or Questionable Disclosures by Enterprises – Reported by the Public

The public, including citizens, legal persons or other organizations, upon finding that an enterprise has submitted false information can report the matter to the AIC.  The public can also apply to other government departments for consultation of matters relating to an enterprise information where it has doubt as to any information disclosed by an enterprise.  The responsible AIC or government department has 20-working days to respond.

VI.  Verification and Random Audit Scheme

Under the Enterprise Information Disclosure Rules, the AIC can conduct random audits on information disclosed by enterprises.  These may take the form of written review, field verifications or online monitoring.  It also has the authority to engage law firms, accounting firms or tax agencies to conduct such audits.

The AIC is required to make the public the results of the findings of its audit.  The results must be posted on the enterprise credit information system.

Conclusion

The new regulations are in the right step of moving towards developing more transparency of information which the public should be entitled to access when determining the creditworthiness of an enterprise.  However, much remains to be seen whether enterprises will embrace these new regulations and make appropriate disclosure, and whether in fact the information required for disclosure is sufficient to achieve a reliable, functioning national credit system.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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