There were a series of articles last week regarding 10 IPO applications that were “rejected because their performance had failed to meet government standards or because their reporting was inadequate.”. The rejections were based on regulations issued by SEPA and the China Securities Regulatory Commission (CSRC) going back to 2003, but this news was coupled with the fact that SEPA has issued a new “Guiding Opinion on Strengthening the Supervision and Management of Environment Protection of Listed Company” (Chinese version here) which imposes environmental reporting obligations upon companies that are already listed.
As Pan Yue, deputy director of SEPA, noted “now that the practice of environmental disclosure in the IPO process has become more or less established [based on compliance with the regulations issued in 2003 and thereafter], it is time to tighten disclosure rules for companies that listed before environmental impact became a required reporting item.” Thus, among other things when one of the following events happens that can affect the trading price of a company’s listed shares the company must disclose them:
● Any newly promulgated environmental law, regulation, rules or industrial policy that may significantly affects the company;
● The company is investigated, criminally punishment, or a major administrative punishment is imposed by the environmental administration due to any violation of environmental laws or regulations;
● A major investment such as new building, renovation or expansion project will have significant environmental impact;
● A company operation has been ordered to correct an environmental violation within a specified period of time or be shut down;
● The company is involved in an major lawsuit involving environmental issues and its main assets have been frozen, mortgaged or pledged;
● Any other major events set forth by Measures for the Disclosure of Environmental Information that may considerably affect the trading price of a listed company’s shares.
These moves are in line with other recent efforts (including the Measures for the Disclosure of Environmental Information which are cited in the last bullet point and become effective on May 1, 2008). Remember though that rules applicable to listed companies only catch the low hanging fruit. Companies large enough and sophisticated enough to list on a domestic exchange should be in the vanguard of environmental compliance efforts. It’s a little distressing that 27% of the IPO applications reviewed failed to meet the environmental compliance standards. Imagine what the compliance percentages must be in the hundreds of thousands of companies too small and too parochial to consider listing.