EL MODELO COSO ERM PARA GESTIONAR EL RIESGO DE FRAUDE

Apart from disclosure requirements, listed companies and their directors, supervisors, and other senior personnel are subject to other continuing obligations once their shares are listed on stock exchanges. Those who provide professional services to listed companies are also subject to certain obligations in respect of the company shares which have been listed with their help. Companies whose shares have been issued to the general public but not yet been listed on a stock exchange are likewise subject to the continuing obligations applicable to listed companies.

Purchase o f Own Shares by Listed Companies. Article 149 (1) of the 1993

Company Law stipulates that a joint stock company may not purchase its own shares except where the shares need to be cancelled for the purpose of reducing capital, or where the company merges with another company which holds shares in the company. If a company has purchased its own shares as a result of either reducing its capital or merging with another company, it must register the changes of its share capital and cancel the shares purchased within ten days, and make a public announcement thereafter.^* Pursuant to the 1993 Provisional Regulations on the Administration of Issuing and Trading of Shares, the purchase of own shares by a listed company requires the prior approval of the CSRC.^^ If the shareholding of an individual person exceed 0.5% of a listed company, the excess amount may be purchased by the company at the lower of the original purchase

Article 67, 1993 Provisional Regulations on the Administration o f Issuing and Trading o f Shares. id.. Article 149 (2).

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price or the market price after having obtained the prior approval of the CSRC.^° But if the individual’s shareholding has become 0.5% or more as a result of the reduction in the company’s total amount of outstanding shares, the excess amount may not be purchased by the company within a reasonable period of time.^*

On 1 August 1994, Shandong Bohai, a listed company on the Shanghai Stock Exchange, caused its A-share price on the Shanghai Stock Exchange to soar 102% during the course of the day. It did so by repeated trading and false purchases and sales through four individual accounts which did not involve the transfer of ownership of shares. Subsequently, from 1 to 31 August, the company used about Rmb 19.9 million of its own funds to purchase 3,981,200 of own shares. Following an investigation, the CSRC announced that Shandong Bohai’s dealing contravened Article 149 of the 1993 Company Law on the grounds that the purchase dealing did not comply with the circumstances prescribed by the provision, namely, when cancelling shares in order to effect a capital reduction or when merging with a company which holds its shares. It also violated Article 41 of the 1993 Provisional Regulations on the Administration of Issuing and Trading of Shares since it did not obtain the prior approval of the CSRC. The company was fined by the CSRC Rmb Im and the senior officer who was directly responsible for the trading was fined Rmb 50,000. In addition, the illegal gain of Rmb 5.9m by the company was confiscated.^^ This is one of the reported cases investigated by the CSRC and the stock

id.. Article 46. Id.

For a summary o f the case in English, see "Securities Fraud in the PRC: Case Digest", China Law & Practice, 1995, Vol. 9, No. 3, p. 21.

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exchange concerned which shows the operation in practice of the statutory and regulatory rules relating to the purchase of own shares by listed companies.

Rights Issue by Listed Companies. In 1996 the CSRC issued a circular to tighten

control over rights issues by listed companies as a result of irregularities which happened when listed companies conducted their rights issues.^^ It set out more stringent rules regarding the conditions to be met for a rights issue, the procedure for information disclosure both before and after the offering of rights issues, the amount of shares to be placed with shareholders, and the application of the proceeds of a rights issue. All listed companies which intended to offer a rights issue to their shareholders were urged to comply with these rules and put forward their applications to the regulators accordingly. They were also urged to follow the standard format for documents prescribed by the CSRC regarding rights issues by listed companies^'^and comply with the requirements for the submission of relevant documents for the approval of applications.^^

Directors, Supervisors and Senior Personnel. Article 147(2) of the 1993 Company

Law stipulates that directors, supervisors, and the general manager shall declare their holdings of company shares to the company and not transfer such shares during their term of office. Article 62 of the 1993 Provisional Regulations on the Administration of Issuing and Trading of Shares further requires that the directors, supervisors, and senior personnel of a listed company who have holdings of company shares are under an obligation to

Circular of the CSRC on Rights Issues in the Year 1996 by Listed Companies, 24 January 1996. Standard Format of Documents for Renew o f Rights Issue by Listed Companies, 3 November 1994. For a brief summary, see China Law & Practice, No. 1, 1995, p. 10.

The documents required include among others: application, decision o f shareholders’ meeting, a feasibility report on the use of proceeds raised, a rights issue prospectus.

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report the details of their holdings to the CSRC, the stock exchange where the company is listed, and the company itself. If any change occurs in their holdings, they are required to report such within 10 days from the date of the change. They continue to be under this obligation for six months after they retire from or leave office.^^ If directors, supervisors and senior personnel make any profit by selling shares within six months of purchasing them or from buying shares within six months of a previous sale, they are required to return the profit to the c o mp a n y . Un d e r Article 37 of the 1993 Provisional Measures on the Administration of Stock Exchanges, stock exchanges have an obligation to keep records of shareholdings by directors, supervisors and senior personnel of a listed company and supervise share movements. This position remained the same under the amended 1996 Measures on the Administration of Stock Exchanges.

Restrictions on Share Dealing. Under the the Provisional Regulations on

Administration of Issuing and Trading of Shares, certain persons are restricted from purchasing, holding, or selling shares. These restricted persons include accountants, asset valuers, and lawyers who are engaged in the assessment, evaluation, and verification of a particular share issue or a listing on a stock exchange. If they are providing services in relation to a particular share issue, they are not allowed to purchase or hold such shares during the underwriting period and for six months thereafter;^* If they are providing services for a proposed listing, they are not allowed to purchase the shares of the company

Article 62(2), 1993 Provisional Regulations on Administration o f Issuing and Trading o f Shares. id.. Article 38.

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before the document which they are preparing becomes public and for five days thereafter/^ The same would apply to those who are involved in the production of other documents for a proposed listing, such as the auditor report or asset appraisals, in that they are prohibited from purchasing shares of the company prior to the release of the documents. Anyone who violates these provisions will be ordered to sell their shareholding and be subject to a caution, confiscation of illegal gains, and a fine between Rmb 5,000 and 50,000 pursuant to the 1993 Provisional Regulations on the Administration of Issuing and Trading of Share."^®

Suspension arid Cancellation o f Listing. Pursuant to Article 157 of the 1993

Company Law, suspension of a listing could be imposed by the securities authorities if (i) the share structure of a company has been changed so as to make the company fall short of the requirements necessary for listing; (ii) the company has failed to make public disclosure about its financial situation in compliance with the listing rules or has falsified financial accounting reports; (iii) the company is involved in illegal activities; (iv) the company incurs losses over the last three years. If the consequences of (ii) or (iii) above are serious, or the occurrence of (i) or (iv) has not been rectified within a time limit, cancellation of the listing would be imposed."^* A listing may also be cancelled when the company is dissolved, or the company is closed down by the authorities, or is declared bankrupt."^^ Stock exchanges may make decisions on suspension, reinstatement, and

id.. Article 40(2). id.. Article 72.

Article 158(1), 1993 Company Law.

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cancellation in accordance with their listing rules and the listing agreements between the stock exchange and the company, or in accordance with a request from the CSRC. Suspension and cancellation of a listing is an effective measure to deter listed companies from violating listing rules and disclosure procedures, but it is normally a last resort when other alternative measures could not rectify the circumstances.