Credit report replaces China no-violation certificate

The Guangdong government this year released its plan to replace the non-violation certificate with credit reports, allowing companies to print their own reports showing that they have not broken any laws or regulations, which means that they no longer have to go to several departments to request the certificates.

The implementation plan of the credit report replacing the certificate of non-violation of laws and regulations for businesses was part of the reform of “streamlining administration, devolution of power, strengthening of regulations and upgrading of services ”.

The reform, which also covers taxation, drug regulation, housing provident funds, and occupational health and safety, is a positive step towards effective use of data to streamline the administrative process, thereby alleviating the burden. on business. The new business environment is expected to be more favorable for companies to carry out their listing, financing and other business activities.

Lam yee hung
ETR law firm

Certificates of non-violation

Under article 18 of the Measures relating to the administration of the initial public offering and the listing of shares, companies wishing to be listed must be able to prove that they “have not been subject to any sanction. administrative for serious breach of regulations in industry and commerce, taxation, land, environmental protection, customs or other laws or administrative regulations in the last 36 months ”.

The regulations require that the business activities of the issuer not seriously violate any law or regulation, otherwise the issue would likely be blocked. In addition, in accordance with the requirements of the Standards relating to the content and formats of information disclosure by companies offering securities to the public No.12 – Legal opinions and working reports of lawyers on the public offering of securities, the council of the issuer, when preparing its work reports, must give their legal opinion on whether the issuer has operated legally and in accordance with the regulations and disclose all this information.

As such, the issuer is required to obtain from the local authorities of industry and commerce, taxation, land, environmental protection and customs a certificate of non-violation, which will be used basic to the legal advice of the board. The problem, however, is that the five departments mentioned above often cannot comprehensively cover all of the issuer’s business activities. Depending on the characteristics of the sector in which it operates and its field of activity, the issuer may also be required to obtain such certificates from the local services for the administration of medical products, emergency management, housing insurance, human resources and social security, currency administration, urban management or the Development and Reform Commission.

黄 乾元, Huang Qianyuan, Paralegal, ETR Law Firm
Huang Qianyuan
ETR Law Firm

Heavy process

When applying for registration, in addition to the main entity to be registered, its wholly-owned, majority-owned subsidiaries and other largely-owned subsidiaries are also examined. All the companies involved must then obtain certificates of non-violation from a dozen departments. For each service concerned, the issuer would have to prepare application files, make appointments and go through a lengthy review process. Sometimes additional delays are caused by unclear operating instructions or mismanagement by company staff. It could take up to two months before all certificates are finally assembled.

Besides the considerable time, there are also instances where the local service has never established a consistent application and approval process, or is not familiar with how these certificates are issued. The worst possible scenario for the issuer would be that the relevant department refuses to issue the certificate in accordance with administrative rules and regulations.

In 2020, an ecology and environment service refused to issue the certificate to an applicant company, on the grounds that the opinion of the Ministry of Environmental Protection on the reform and adjustment of the environmental protection audit work, released in 2014, required the protection authority to stop accepting and conducting environmental protection exams for public registration purposes, and to stop issuing relevant documents, including the certificate of non-violation.

Subsequently, the board of the issuer and securities dealer explained to the Department of Ecology and Environment that the aforementioned regulation was abolished in the decision of the Department of Environmental Protection to repeal certain departmental rules and regulatory documents on environmental protection in 2016, from which the base no longer existed. However, the ministry again refused to issue the certificate, responding that although the law had been repealed, there were no other laws or regulations in force authorizing them to issue the certificate.

All companies looking to go public have to bear a significant cost and contact key departments to obtain such certificates. To make matters worse, laws and regulations alternate from time to time, and relevant departments may undergo changes in personnel or responsibility, meaning that some functioning systems may not have been established or supported by a system that has been implemented. up to date. This was another major potential obstacle for companies to obtain the certificates.

Reform vision

In the annex of the implementation plan, the departments included for data sharing are the Provincial Development and Reform Commission, the Department of Human Resources and Social Security, the Department of Housing and Urban-Rural Development. , the department of culture and tourism, the department of emergency management, the administration of market regulation. , tax service, fire and rescue service, administration of medical products and administration of health security, capable of issuing non-violation certificates in 11 areas. This considerably covers the certificates required for potential listing companies, which saves a tremendous amount of time and money. Companies can now benefit from a much more flexible schedule for obtaining certificates in the application process, which has become faster overall.

On the other hand, the reform has not yet included the Department of Ecology and Environment, Customs and Exchange Administration in the framework of data sharing. It is common for potential quotation companies, which are often significant players in their own industries, to participate at some level in transactions abroad, such as the export of products or the import of raw materials. This makes them easily subject to customs regulations and foreign exchange administration. Protecting the environment is a question that almost all candidate companies have to resolve. We can’t wait to see data from more departments included in the online credit report that businesses could easily access with a printer.

We hope to see the scope of the reform expand in the future to be more inclusive in its data sharing. Let data do the work for people, allowing potential listing firms and their intermediaries to devote more time to their core business.

Lam Yee Hung is a partner and Huang Qianyuan is a paralegal at ETR law firm

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