Environmental checks for listed companies tightened

Following the Documents to be Submitted When Production and Operating Companies in Heavily Polluting Industries Apply for IPO Notice, issued by the China Securities Regulatory Commission (CSRC) in January 2008, the Ministry of Environmental Protection issued the Further Regulating Strict Environmental Protection Checks of Listed Companies Notice on 14 February this year. The latest Notice imposes more stringent requirements in respect of environmental protection checks on listed companies.

Listing-related checks

The system of listing-related environmental protection checks by PRC environmental protection authorities applies to companies in heavily polluting enterprises that are applying to list on a stock exchange, and to listed companies in such industries that are applying for further financing. The objective of the checks is to compel listed companies to comply with environmental protection laws, regulations and policies, while also controlling how proceeds raised from the public are invested. An enterprise in a heavily polluting industry that has not undergone an environmental protection check may not apply to list or for further financing.

Targets of the checks

Any company that engages in, or is seeking to raise funds to engage in, any of the following heavily polluting industries, and which intends to apply to list or for further financing, is required to undergo an environmental protection check:

1. 1. metallurgy, chemicals, petroleum, coal, fossil fuel power generation,
      construction materials, paper making, brewing, pharmaceuticals, fermentation, textiles, leather making and mining; or
   2. thermal power generation, iron and steel, cement and electrolytic aluminium.

A check on a company will include checks on its branches, wholly owned subsidiaries and subsidiaries in which it has a controlling interest.

Checking authorities

The provincial or municipal-level environmental protection authority is responsible for conducting the checks on listed companies in type 1 industries, above. The Ministry of Environmental Protection is responsible for conducting the checks on those in type 2 industries, and those engaging in production or operation in any of the type 1 industries in more than one province.

The Notice specifies that a company that is subject to a full check by an environmental protection authority must first secure a preliminary review opinion from the relevant provincial-level environmental protection authority. The Ministry of Environmental Protection will only accept an application for a full check once a company has passed this preliminary review. If a company that is subject to a full check by a provincial-level environmental protection authority engages in production in more than one province, the provincial authority responsible for the main province may request assistance from the relevant environmental protection authorities in other provinces.

Materials to be submitted

A company applying for a check must submit an application for the check, its listing plan or further financing plan (a copy of the prospectus), and a technical environmental report. The truthfulness of the materials is of great importance. If the applicant is found to have falsified information or deliberately concealed a major violation of the law, the check will be terminated and no further application for a pre-listing check will be accepted from that company for one year.

Stricter oversight

Where a company has recently committed a serious violation of environmental laws, has violated environmental laws and failed to rectify the situation, has falsified information or has deliberately concealed a major violation of the law, the Notice specifies serious consequences. It is widely believed that if the Notice is followed, the past practice of “list first, then rectify” will have to cease.

Major violations of the law

The Notice specifies that if a company has committed a major violation of environmental laws in the year prior to its application for a check, its application will be rejected. “Major violations of environmental laws” include the occurrence of a serious sudden environmental incident; failure to reduce discharges of a major pollutant; being ordered to reduce pollution within a specified period of time, to restrict production and discharge or to suspend production and undergo rectification; having been penalized by the Ministry of Environmental Protection or the provincial-level environmental protection authority; and having been fined more than RMB100,000 (US$15,000) by an environmental protection authority. It should be noted that this provision only comes into effect six months after the Notice was issued (i.e. on 14 August).

Failure to rectify a violation

The Notice specifies that an application from a company that has failed to rectify a violation of environmental laws will be rejected and will not be accepted again for six months.

Elimination of latent hazards

The Notice specifies that an environmental protection authority, in the course of a check, is required to step up the on-site inspection of, and supervision of the rectification of, the latent environmental safety hazards of companies. In particular, with respect to companies that have a connection with heavy metals, hazardous chemicals or tailing ponds, the authority is required to arrange for experienced personnel to step up on-site inspections and promptly require a company to rectify any problem that is found. For an enterprise that has a major environmental problem, the authority may issue a preliminary opinion or a check opinion giving its consent only after the company has completed rectification and this has been verified on site.

Strengthening protection

The issue of the Notice marks a further improvement and strengthening of the system governing environmental protection checks on listed companies. In the course of their day-to-day operations, companies should pay close attention to environmental issues and improve their environmental management so as to avoid a situation in which environmental protection problems become an obstacle to their listing and development.

Wang Jihong is the managing partner of V&T Law Firm. She practises in the field of infrastructure development. Shi Jie is a lawyer at V&T Law Firm