The China Securities Regulatory Commission (CSRC) carried out the special activity of listed companies' governance in 2007, to strengthen the construction of the capital market's fundamental system and the implementation of the newly-modified “Corporation Law” and “Securities Law” as well as the new situations and demands after the equity division reform. Through this activity, China's listed companies have strengthened the awareness of standardized operation and improved the internal control mechanism. Meanwhile, some general problems have cropped up in the listed companies' governance structure. For example, the listed companies lose the independence due to controlling shareholders' interference; independent directors' duties are unclear; the operation of special committees under a directorate becomes formalistic.

To improve the governance of China's listed companies, the CSRC has decided to deepen the governance based on its achievements in 2007. Priority should be given to the following tasks: firstly, the behavior of listed companies' controlling shareholders and actual controllers should be disciplined to strengthen the listed companies' independence; secondly, the listed companies' liquidation achievements should be consolidated, and a long-term mechanism should be established to prevent major shareholders' capital occupation, strengthening the investigation and punishment on capital misappropriation by the major shareholders and their subsidiaries; thirdly, the mechanisms of internal inspection, collection and disclosure for the listed companies' sensitive information should be intensified, to further standardize the listed companies' information disclosure. The issues concerning promotion of the special activity of the listed companies' governance in 2008 are hereby announced as follows:

1. Listed companies should improve the internal control system, perfect the accountability mechanism and the connected transactions, thus establishing a long-term mechanism of preventing major shareholders and their subsidiaries from occupying the listed companies' capital and infringing upon the listed companies' interests. Each company should work out specific measures to prevent its shareholders or actual controllers from encroaching upon the listed companies' assets, and define the legal obligations of directors, supervisors and senior management in safeguarding the listed companies' capital. The directorates of the listed companies should spare no pains to implement the mechanism of “freezing shares held by major shareholders once capital occupation occurs”. Furthermore, the CSRC agencies should focus on the examination of the establishment and implementation of the above systems. All the companies should cooperate with the agencies.

Listed companies should periodically report the capital exchange with related parties to local agencies. The listed companies whose capital has been occupied should withdraw the occupied capital as soon as possible, and the CSRC and its agencies will launch the procedure of placing case on file for investigation. The directors, supervisors and senior management conniving at or assisting in major shareholders' capital occupation of listed companies will be regarded as ineligible by the CSRC, which should report it to the state-owned assets management authority or organization authority and the banking watchdog; whoever suspected of crime shall be transmitted to the public security authority for criminal liabilities.   

2. Listed companies should improve the information disclosure system to guarantee the information's authenticity, accuracy, integrity, timeliness and fairness.

Listed companies should further clarify the following issues in the “Management System of Information Disclosure”: the procedures of compilation, discussion and disclosure of periodical reports; the procedures of report, delivery, examination and disclosure of significant events; the systems of information inquiry, management and disclosure of shareholders and actual controllers; accountability mechanism of information disclosure.

Listed companies should spare no pains for the systems of inspection, collection, confidentiality and disclosure of sensitive information and reduce the insider dealing and the stock price manipulation, to effectively protect small and medium investors' interests. 

3. Before July 20, 2008, listed companies should make explanations on the issues under rectification in their rectification reports on corporate governance by June 30 and disclose publicly in the form of directorate resolutions on the exchanges' websites. Specific contents shall be as follows: whether the rectification can be completed in the prescribed time or not, the reasons for failure in completing the rectification and the to-be-adopted measures (including punishment measures on the personnel responsible for the rectification); the rectification effect of problems under continuous improvement and further improvement plan. Moreover, the listed companies should report their rectification explanations on corporate governance to the local agencies for examination, and publish them on the exchanges' websites if the local agencies have no dissents.

4. Listed companies should complete rectification of all the issues listed in the rectification report of corporate governance before November 30, 2008. The CSRC agencies will carry out check and acceptance on the rectification work of the listed companies' governance within the jurisdiction by on-the-spot examination, and all the listed companies should cooperate with the agencies.

5. As to the listed companies failing to complete the rectification within the prescribed time, the CSRC agencies should urge them to implement rectification by means of interviews with the personnel responsible for rectification, sending surveillance attention letters, internal public criticism in written forms and reporting to local governments and related authorities.

As to the listed companies refusing to rectify the promised issues without valid reasons, the CSRC should impose supervision measures on the companies and the personnel responsible for rectification, such as ordering them to rectify, recording them in credit record, public criticism, recognizing them as ineligible and banning of market entry.

6. After November 30, 2008, the CSRC will no longer receive equity incentive and refinancing applications of the listed companies with non-finished rectification on the governance structure and other problems in the corporation governance. As to the application materials that have been already received, the CSRC will pay close attention to the examination process.

7. Listed companies, failing to participate in the special activity by June 30, 2008 due to mergers and acquisitions (M & A) and restructuring and new listing, are supposed to complete self-investigation before July 31, 2008 and disclose self-investigation reports and rectification plans on the exchanges’ websites. Moreover, their rectification reports should be disclosed before October 31, 2008. According to requirements of the special activity, the CSRC agencies will carry out check and acceptance on the rectification by on-the-spot examination on the companies.

June 12, 2008

Source: CSRC Listed Company Supervision Department