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The highs and lows of changing corporate disclosure rules in China

The highs and lows of changing corporate disclosure rules in China

Companies will need to begin disclosing key new information

Obtaining corporate information in China has traditionally been a frustrating, unreliable and occasionally futile endeavour. Until recently, access to publicly-available filings about companies was at the mercy of a range of unpredictable forces, including the funding provided to local AIC bureaux that enforced filing requirements and organised data, the prevailing political winds in Beijing and the interpretation of the rules by individual officials.

Since the end of 2013, however, there has been a series of reforms to corporate disclosure rules in China which has changed, and is changing, the landscape significantly. Firstly, long awaited changes to PRC Company Law came into effect in March 2014; key reforms include a range of measures that have made it easier for new companies to register as legal entities with corporate registries. Apparently to facilitate this process, access to corporate information was comprehensively overhauled in following months. Basic registration information for companies across the country was standardised, digitised and openly published via a central database in a much more reliable manner than before.

More changes are set to follow. In August this year, the State Council further approved new regulations regarding how corporate information should be disclosed. These regulations came into force on 1 October and will, of course, impact the availability of corporate information and how corporate investigations may be conducted in future. The exact details of the new corporate disclosure rules are set out in full in this document published by the State Council. It describes some key new information that companies will need to disclose, including:

  • More details on the committed capital, the specific time and amount in which instalments were paid

  • Shareholding changes

  • Obtaining, amending and renewing any administrative permits

  • Intellectual property pledge registration

  • Details of online operations

  • Various government penalties

Despite this list, however, lawyers have told us that the new rules do not universally improve transparency. Rather, they were of the opinion that these regulatory changes represented both ‘highs and lows’ for those seeking corporate information in China.

Highs

  • New requirements for companies to report changes in basic corporate information within 20 days of the changes taking place. Previously, corporate registries held information that were frequently months or even up to a year out of date. Failure to observe this rule would result in companies being placed on a blacklist maintained by its local AIC (though it is not clear how any breaches would be detected). In future, up to date corporate information is expected to be much more accessible.

  • Centralisation and public disclosure of any administrative penalties levied on a company or director by a range of government departments including the AIC, tax authorities, environmental regulators and customs. Sources told us that in the past records of such penalties had to be obtained from each different government department separately; these bureaus, in turn, could not be counted on to cooperate even with valid reasons for disclosure and all the necessary licences. These irregularities will disappear in future.

Another important development will be a system to differentiate between severity of misdemeanours and a special blacklist for companies that had received particularly egregious penalties in the past. This will make it even easier for customers and other businesses to quickly understand the reputation of a potential business partner.

Lows

  • From October, companies may choose to disclose - or withhold - details of their financial performance. While companies had previously been required to file annual financial accounts with corporate registries, information on company performance such as assets and liabilities, profit and loss, revenue and sales forecasts is now categorised as private. Legal experts told us that this will impact investigations related to corporate assets, such as credit worthiness and changes in financial situation.

  • Annual inspections of company accounts will now be replaced by self-reporting plus ad hoc inspections. Opinion on the likely effectiveness of this is mixed. Some see this as a form of looser regulation which may encourage falsification of information. Others commented that previously, annual inspections for every single company placed such a heavy burden on regulators that actual inspections rarely took place and fraud was widespread. Thus, random inspections actually carried out is likely to be more effective in deterring fraud.

Chinese media commentary on recent regulatory changes observed that the two sets of reforms - in Company Law and corporate disclosure regulations - form two sides of the same coin. Entrepreneurs are being freed from many bureaucratic burdens, making it easier than ever to set up new companies. Meanwhile, the regulatory ‘gap’ left by receding official scrutiny is set to be filled by scrutiny from a wider set of stakeholders - i.e. the general public and the company’s business partners and customers. This will be facilitated by greater transparency of corporate information, particularly of past wrongdoing.

It remains to be seen whether this controlled and variegated release of corporate information will have the positive effects envisioned. Meanwhile, those we canvassed in the legal community agreed that the changes we are now witnessing represent a gradual move towards transparency, rather than a revolution.

Rebecca Palser
3rd October 2014
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