Chinese Regulator Releases Guidance Document on Uncovered Losses of Listed Companies

The China Securities Regulatory Commission (CSRC), Chinese capital market watchdog held a press briefing to issue a guidance document(CSRC Announcement [2012] No.6), detailing regulation requirements as regard to uncovered losses of listed companies after major asset reorganization.

A CSRC official said the guidance document clarified regulation requirements for listed companies, which had uncovered losses after major asset reorganization. After share issue, asset acquisition or major asset reorganization, a new listed company inherits uncovered losses of the original listed company. According to the Company Law and the Administrative Measures for the Issuance of Securities by Listed Companies, the new company would not be able to distribute cash dividends or refinance through public securities issue for a long time because of the uncovered losses. First, the guidance document ordered that the listed companies must not use its capital reserve to cover the losses according to the Company Law. Second, the listed company must not cover the losses by transferring the capital reserve to increase share capital and shrinking stock circulation to circumvent relevant regulations. Third, the listed company should alarm risks about the uncovered losses in provisional announcements and annual reports. Fourth, when it makes a major asset reorganization, the listed company should alarm risks about inherited losses in the reorganization report.

The official said the CSRC will study and closely follow new problems and new situations in regulation of listed companies, and inform the public of those cases, so as to make its regulation more transparent and easier to understand, and form a unified yardstick for regulations of the CSRC and stock exchanges.