Several Issues Concerning the Regulation of Cash Flows Between Listed Companies and Their Affiliates and Security Provided to Outside Parties by Listed Companies Circular

Cash flows between listed companies and their controlling shareholder and other affiliates shall be in compliance with the following provisions:

(1) In the flow of business funds that occurs between a controlling shareholder or other affiliates and listed companies, the appropriation of the funds of listed companies for one's own use shall be strictly limited. Controlling shareholders and other affiliates must not require listed companies to pay periodic expenses such as wages, welfare, insurance and advertising expenses to be paid back later, and neither may they bear each other's costs and other expenditures;

(2) Listed companies must not directly or indirectly provide funds to a controlling shareholder or other affiliates for their use in the following ways:

(a) lend, with or without compensation, the company's funds to a controlling shareholder or another affiliate for their use;

(b) provide entrusted loans to an affiliate through a bank or a non-banking financial institution;

(c) entrust a controlling shareholder or another affiliate to carry out investment activities;

(d) issue a negotiable bill of exchange without a real transaction background to a controlling shareholder or another affiliate;

(e) repay debts on behalf of a controlling shareholder or another affiliate; or

(f) other methods recognized by the China Securities Regulatory Commission.

(3) During the auditing of a listed company's annual financial and accounting report, the certified accountant shall issue a special explanation of the status of funds of the listed company appropriated by the controlling shareholder and other affiliates in accordance with the above provisions and the company shall make an announcement in respect of the special explanation.

2. Strict Control of the Risk of Security Provided to Outside Parties by Listed Companies

All the directors of a listed company shall carefully handle and strictly control the debt risks arising from security provided to outside parties and, in accordance with law, bear joint and several liability in respect of losses arising from illegal or inappropriate security provided to outside parties. Neither a controlling shareholder nor other affiliates may compel a listed company to provide security for another person.

Security provided to outside parties by listed companies shall comply with the following provisions:

(1) Listed companies must not provide security to a controlling shareholder or another affiliate in which the company holds less than 50% of the stock nor to any non-legal person work unit or individual.

(2) The total amount of security provided to outside parties by a listed company must not exceed 50% of the net assets in the consolidated accounting statements for the recent financial year.

(3) The articles of association of listed companies must include rules on the examination and approval procedures for security provided to outside parties and the credit standards for the secured party. Security provided to outside parties must obtain the written approval of at least two-thirds of all members of the board of directors, or the approval of the shareholders' meeting. Debt security shall not be provided directly or indirectly to secured parties whose assets-to-liabilities ratio exceeds 70%.

(4) Where a listed company provides security to an outside party, it must require the other party to provide counter-security, and the party providing the counter-security must have the capacity to actually make such an undertaking.

(5) Listed companies must strictly abide by the relevant provisions of the listing rules and the company's articles of association, conscientiously perform information disclosure obligations on the status of security provided to outside parties and must, in accordance with the regulations, truthfully provide to a certified accountant all the items of security provided to outside parties.

(6) The independent directors of a listed company shall provide in the annual report a special explanation in respect of the listed company's accumulated and current status of security provided to outside parties and the status of the implementation of the above-mentioned provisions, and shall issue an independent opinion thereon.

3. Further Strengthening the Screening of Illegal Appropriation of Funds and Security Matters that Have Already Arisen

(1) Within one month of the date on which this Circular is issued, listed companies shall, in accordance with the provisions of this Circular, carry out a self-examination of the status of cash flows, appropriation of funds and security to outside parties between the listed company and its controlling shareholder and other affiliates.

The self-examination report shall be submitted for record filing to the company's local agency of the China Securities Regulatory Commission within the stipulated period and, following examination and verification or inspection by the local agency, it shall be disclosed as a significant item in the annual report for the latest period.

(2) The State-owned assets supervision and administration authority shall guide and coordinate listed companies controlled by State-owned shares to solve the problems of illegal appropriation of funds and affiliated security, and shall request the relevant controlling shareholders to respect and uphold the business autonomy and lawful rights and interests of listed companies, promote the lawful operation and management of listed companies, improve the legal person governance structure and boost the market competitiveness of listed companies.

(3) The board of directors of a listed company shall target the historical problems of appropriation of funds and security provided to outside parties, formulate feasible measures for solving such problems and ensure that the amount of funds used and the contingent debts arising from security provided to outside parties in violation of this Circular are reduced by at least 30% per financial year.

(4) Funds of listed companies appropriated by affiliates, in principle, must be paid back in cash. On condition that current laws and statutes are complied with, creative financial methods may be explored to pay off the debts, provided that they are submitted for approval to the relevant government department in accordance with the statutory procedures.

(5) The repayment of funds of a listed company appropriated by an affiliate using non-cash assets must be strictly controlled. Where an affiliate plans to use non-cash assets to repay the appropriated funds of a listed company, it must adhere to the following provisions:

(a) The assets used as repayment must belong to the same business system of the listed company, be beneficial to the enhancement of the independence and core competencies of the listed company, reduce affiliated transactions and must not be assets that have not been invested and used or assets for which the net book value has not been objectively clarified.

(b) Listed companies must hire an intermediary with a securities and futures related business qualification to carry out an appraisal of the assets that comply with the debt repayment conditions. The appraised value of the assets and the audited net book value will be the basis for fixing the price for debt repayment. However, the final fixed price must not harm the interests of the listed company and shall be discounted after full contemplation of the current value of the funds appropriated.

The audit report and appraisal report must be made public.

(c) Independent directors must issue an independent opinion in respect of the listed company's affiliate's plan for debt repayment by assets or hire an intermediary with a securities and futures related business qualification to issue an independent financial advisory report.

(d) The plan for debt repayment by assets of a listed company's affiliate must be submitted to the China Securities Regulatory Commission for approval. If the China Securities Regulatory Commission considers that the plan for debt repayment by assets does not comply with the provisions of this Circular, or it clearly harms the interests of the company and small and medium investors, it may stop the implementation of such plan.

(e) The plan debt repayment by assets of affiliates of a listed company must be examined and approved at a shareholders' meeting, and the affiliate's shareholders must refrain from voting.

4. Pursuing Liability in Accordance with the Law for Activities of Illegal Appropriation of Funds and Security Provided to Outside Parties

(1) Departments such as the China Securities Regulatory Commission and the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) shall strengthen regulatory cooperation, jointly establish the supervision and administration cooperation mechanism for the regulation of the activities of controlling shareholders that are State-owned, enhance the strengths of inspection and handling of illegal appropriation of funds and security provided to outside parties, and pursue the related parties for legal liability in accordance with the law.

(2) Where a listed company and its senior management such as directors, supervisors and managers violate the provisions of this Circular, the China Securities Regulatory Commission shall order rectification and punish in accordance with the law, and shall not accept an application for refinancing from such listed company within 12 months from discovering the listed company's violation of the provisions of the Circular.

(3) Where a controlling shareholder of a listed company violates the provisions of the Circular or fails to promptly repay the illegally appropriated funds of a listed company, the China Securities Regulatory Commission shall not accept an application for such listed company for a public offering of securities or other item for examination and approval, and shall circulate a notice to the SASAC, China Banking Regulatory Commission and relevant local governments about the bad credit record of such listed company.

Where a controlling shareholder that is State-owned violates the provisions of this Circular, the State-owned assets supervision and administration authority shall impose disciplinary penalties up to dismissal from a post in accordance with the law on the directly responsible persons in charge or directly responsible persons; and where damage is caused to the rights and interests of the listed company or other shareholders, corresponding liability for compensation must be borne. Where a directly responsible person in charge or directly responsible person of a controlling shareholder that is not State-owned violates the provisions of this Circular, causing losses to the listed company or seriously harming the rights and interests of other shareholders, they must bear the liability for compensation, and shall be punished in accordance with the law by the relevant department. Where a crime is constituted, criminal liability shall be pursued in accordance with the law.

5. Miscellaneous

The term "affiliates" herein shall follow the provisions of the Ministry of Finance, Enterprise Accounting Guidelines