Each year, from March to June, foreign-invested enterprises (FIEs) have been subject to annual inspections conducted by the State Administration for Industry and Commerce and its local branches (SAIC). From this year, there will be no annual inspections. Instead, a reporting and disclosure system has been introduced.

On 14 February 2014, the State Administration for Industry and Commerce issued the Notice on Terminating the Annual Inspection of Enterprises (“Notice”). The Notice states that, from 1 March 2014, annual inspections for all enterprises (including FIEs) will be replaced by an annual reporting and disclosure system. The Notice follows on from the State Council’s Notice on the Reform of the Registered Capital Registration System, issued on 7 February 2014, which also addressed the annual inspection cancellation. Implementing rules for the Notice are expected.

Background

In previous years, all enterprises (including FIEs) were required to be annually inspected by the SAICs. The annual inspection aimed at assessing whether each enterprise was validly established and operated in compliance with PRC law. A company that failed to pass an annual inspection would be ordered to correct its non-compliance within a specified time.

FIEs were required to submit a broad range of materials and documents for the annual inspection. Preparation of the materials for the annual inspection could be time-consuming.

What is the annual report and disclosure regime?

An annual reporting and disclosure system was introduced on 1 March 2014. In practice, and due to the work required to set the system up, it may take some time for the system to be fully operational in all parts of China. The Shanghai SAIC, for instance, has indicated informally that its system may not be fully operational before the second half of 2014, though a trial system is expected to be in place for the Shanghai Free Trade Zone from 1 March 2014.

The reporting and disclosure system will require all enterprises (including FIEs) to upload certain information to the online SAIC registration portal. The information required mainly includes the amount of capital contributed by shareholders and information about the company’s assets. (A complete list of required information is not yet available.) The company must ensure the authenticity and accuracy of the information.

Once uploaded to the SAIC’s portal, the information will be available for inspection by the public.

If an enterprise does not disclose the required information within a statutory time frame, it will be recorded by the SAIC as “abnormal”. The record may be cancelled if the enterprise performs the disclosure obligation within three years. If the enterprise fails to disclose during the three-year period, then it will be permanently recorded as “abnormal” and will in turn be blacklisted as a “seriously non-compliant enterprise”. The blacklist will be available for inspection by the public.

Comments

The Notice is another step in China’s commitment to reform its corporate law system. The termination of annual inspections will also lessen the compliance burden of enterprises in the Mainland. However, implementing rules are expected shortly, and so the full extent of the benefits under the Notice is yet to be seen.