| Title： |
Taiwan Stock Exchange Corporation Procedures for Routine Regulation and Regulation by Exception Over Financial and Business Affairs of Listed Companies(2012.05.18) |
| Date： |
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I General Principles
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| Article 1 | These Procedures are adopted in accordance with Articles 47, 48, and 53 of the Taiwan Stock Exchange Corporation (TWSE) Operating Rules and Article 2 of the TWSE Listing Contract for Securities to strengthen regulation of the financial and business affairs of listed companies.
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| Article 2 | Except as otherwise provided by laws, regulations, or rules, regulation of the financial and business affairs of a listed company by the TWSE shall be conducted in accordance with these Procedures. If there is a change to any article of law or regulation on which a provision of these Procedures is based, the new provision shall govern.
These Procedures do not apply to listed companies in the financial, insurance, and securities industries or to foreign issuers.
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II Routine Regulation
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| Article 3 | Document review procedures regarding filings for effective registration, or applications, by listed companies to offer and issue securities shall be separately prescribed.
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| Article 4 | The TWSE selects at least 10 percent of annual financial reports, at least 5 percent of semi-annual and Q3 financial reports, and at least 3 percent of Q1 financial reports as companies to be audited. A listed company (excluding listed Taiwan Depository Receipts) shall be selected at least once every 5 years as a company to be audited.
After the companies subject to audit are selected, within 20 days after the deadline for the submission of financial reports, the TWSE shall submit the company names and the reasons for writing any special reports, to the competent authority for recordation. Special reports shall be completed before the end of the following month in the case of annual financial reports, within 2 months in the case of Q1 financial reports, and within 1 month in the case of semi-annual and Q3 financial reports, and then submitted to the competent authority for recordation, provided that if the audit case is complex and requires a longer period of time, the TWSE may file with the competent authority for approval to extend the audit period, provided that the extension may not be longer than 1 month.
If any of the following circumstances is found to exist after the audit is conducted, it shall be handled immediately:
- Any material irregularity or violation of securities-related law or regulation shall be reported to the competent authority for further handling.
- Any violation of the TWSE Operating Rules shall be handled in accordance with the Operating Rules.
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| Article 5 | The TWSE shall select companies subject to audit based on the following criteria:
- Selection is based on the following criteria:
- Financial items:
- There is a significant year-on-year decline in operating revenue, operating income, or income before tax.
- The amount of investment loss generated by an equity-method investee company reaches a certain monetary amount or reaches a certain percentage of the company's current operating income, or a subsidiary's total holdings of the parent company's equity reaches a certain percentage of the parent company's equity.
- The total amount of purchases from (or sales to) related parties in the current period reaches 20 percent or more of the total amount of the purchases (or sales) of a listed company, or shows a year-on-year increase of 50 percent or more and reaches 3 percent or more of shareholders' equity.
- The ending balance of receivables from related parties and advance payments to related parties reaches 10 percent or more of shareholders' equity, or increases by 50 percent or more from the beginning of the period and reaches 3 percent of shareholders' equity.
- The cumulative amount of assets traded (excluding purchase and sale transactions) with related parties in the current period accounts for 3 percent or more of the total assets at period-end.
- The increase in the amount of loans to others in the current quarter reaches 3 percent or more of shareholders' equity; or the cumulative amount of loans to others at the end of the period reaches 10 percent or more of shareholders' equity.
- The increase in the amount of endorsements and guarantees in the current quarter reaches 10 percent or more of shareholders' equity; or the cumulative amount of endorsements and guarantees at the end of the period reaches 30 percent or more of shareholders' equity.
- Financial ratios are poor.
- The amount of non-current equity investment accounts for 60 percent or more of shareholders' equity.
- Net worth per share is too low.
- Non-financial items:
- Resignation of a financial officer.
- Resignation of an accounting officer.
- Resignation of an internal audit officer.
- Resignation of a research and development officer.
- Change of certified public accountant (other than an internal adjustment at the accounting firm).
- Change in shareholding of directors/supervisors.
- Change of directors/supervisor (including independent directors), or resignation of the chairperson or general manager.
- The board of directors is authorized to pay compensation for directors/supervisors in accordance with standards in the same industry, and the compensation paid is found to be unreasonable according to the screening criteria.
- The filed report of the most recent month shows that pledges created by directors/supervisors exceed 50 percent or more of the actual shareholding of all directors/supervisors.
- The financial operations of the company are materially affected by any litigation in the most recent year.
- The financial officer or accounting officer is related within the second degree of kinship with any of the directors/supervisors.
If a company that is selected as subject to audit pursuant to the aforementioned criteria was selected for audit in the previous quarter the company may be excluded from the selection list.- A company that meets any of the following criteria is required to be listed as a company subject to audit, provided that it need not be listed if, after analysis, implementation of the audit is deemed unnecessary:
- A company for which any irregularities are discovered by a formality review of its financial report.
- There is a material change in managerial control (such as one third or more of its directors are changed).
- There is any material change to its principal lines of business.
- There have been consecutive deficits in the most recent 3 years, or the accumulated deficit reaches 50 percent or more of the amount of capital stock stated in the financial report.
- The incremental amount of loss before tax as compared to the loss or income before tax in the same period of the preceding fiscal year reaches 30 percent or more of the capital stock stated in the financial report.
- Any of the criteria specified in subparagraphs 3, 4, and 8 of the preceding paragraph is met, and the sum in question is large, the financial ratio is poor, and the company has not undergone a special audit in the previous quarter.
- There is uncertainty about the company's ability to make repayment at maturity for corporate bonds issued by it.
- Cash and cash equivalents account for too high a percentage of capital, and there is no capital expenditure plan.
- The amount of prepayments, or the volatility thereof, is large or irregular.
- The amount of unrealized loss in the trading of derivatives reaches NT$100 million and amounts to 3 percent or more of shareholders' equity, or the amount of open interest held for trading purposes in the period amounts to 40 percent or more of the capital stock stated in the financial report.
- The CPA, in the annual or semi-annual financial report, with respect to equity investment in another enterprise, uses and gives too much weight to audit work of other CPAs. The Q1 or Q3 financial report, with respect to equity investment in another enterprise, uses and gives too much weight to review work of other CPAs or to material that has not been reviewed by a CPA.
- A company newly added to the current-quarter Public Bulletin Board of Companies Whose Financial Operations Require Special Attention.
- A company with relatively high risk indicators for the consolidated financial statement.
- The receivables and amount of inventory in the consolidated financial statement account for too high a percentage of the shareholder's equity.
- The receivables past due for one year or more in the consolidated financial statement reach a certain monetary amount or reach a certain percentage of the shareholders??equity.
- A company for which audit is required by the TWSE for other reasons.
- During each selection, the TWSE also randomly chooses companies for review based on the following criteria:
- Companies that have not undergone routine regulation, regulation by exception, or substantive review of financial report for the most recent 3 years.
- Other criteria for random selection.
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| Article 6 | The following items shall be included in an audit:
- An explanation of the impact on the company of the reasons for which it was subject to the audit, and the company's response measures.
- The attesting CPA's opinions on relevant matters, when necessary.
- Any violation of the securities-related laws or regulations found during the audit.
- Any measures adopted by the TWSE.
- Suggestions to the competent authority.
Attention shall be given to the following matters in the audit:
- Whether investment in derivatives is duly disclosed.
- Whether there is any irregularity in trading with related parties.
- Whether there is any lending to others for any reason other than as necessary for company business transactions.
- Whether there is any irregularity in the purchase or sale of block assets.
- Whether any endorsement or guarantee is made for others for any reason other than as necessary for company business transactions.
- Whether the operations of the board of directors comply with regulations.
- Progress on improving any deficiencies, or follow-up review of any irregularities, listed in the previous review.
If any violation of securities-related laws or regulations is found during the audit, [the TWSE] shall issue a letter notifying the listed company to make improvements. If the circumstances are severe, the TWSE may issue a letter requiring the company to send personnel to attend education classes held by an organization designated by the competent authority, and forward a copy of the letter to the organization. If the company does not send the personnel to attend the classes, the TWSE may, depending on the nature of the deficiencies, list the company as a priority subject for auditing in subsequent substantive reviews of financial reports, routine regulation or regulation by exception, or internal control system audit.
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| Article 7 | The TWSE shall maintain a record of audited companies and conduct follow-up monitoring and control, and list them as companies for test audit for the verification of material information for each quarter.
If an audited company is not found to have had any material irregularities after one year of observation, it may be removed from the record for regulation.
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III Regulation by Exception
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| Article 8 | If any of the following material events occurs to a listed company, the TWSE shall produce an examination report on the impact of the material event on the company's operations or market in accordance with Articles 10 and 11 of these Procedures, and then report to the competent authority for further handling.
- Finance
- The listed company's financial statement for the current period shows a serious deficit, such that the company's net worth is lower than the capital stock stated on the financial statement.
- The CPA produces an audit or review report with a non-unqualified opinion or produces a non-standard audit or review opinion, and the circumstances are serious.
- The listed company, and its parent company or any of its subsidiaries has had a negotiable instrument dishonored due to insufficient funds, or has otherwise experienced a loss of creditworthiness.
- A principal debtor of the listed company has a negotiable instrument dishonored, has filed for bankruptcy, or experienced any other similar event of a material nature; a principal obligor in favor of whom the company has made an endorsement or guarantee is unable to settle a matured negotiable instrument, loan, or other obligation.
- From financial data forwarded by the listed company in accordance with Article 36 of the Securities and Exchange Act, its is found that the company has provided any endorsement or guarantee for a company with which it does not have business transactions, or that it has provided company assets as collaterals for loan borrowings of another person.
- The cumulative actual amounts of expenditures and project progress related to a cash capital increase or issuance of corporate bonds are both lagging behind the scheduled amounts by 25% or more.
- The assets (excluding all types of domestic stock and open-end bond funds) acquired or disposed by a listed company or its subsidiaries reach 20% or more of the capital stock stated in the company's financial report, or NT$300 million or more.
- The amount of open interest in derivatives held for trading purposes in the current month shows a month-on-month increase in an amount that equals 10% or more of the capital stock stated in the financial report, or the combined amount of realized and unrealized losses shows a month-on-month increase of NT$100 million or more.
- The year-on-year rate of increase or decline in operating revenue for the current month is high, or the year-on-year rate of increase or decline in cumulative operating revenue as of the current month is high, and no reasonable cause is seen for the change.
- The year-on-year rate of increase or decline in cumulative operating revenue for a certain period is high, and moved in a direction opposite to that of the industry to which the company belongs.
- Business
- The financial report of the listed company for the current period indicates a serious reduction in production, or a suspension in whole or in part of operations, resulting in a serious deficit, and it is estimated that the circumstance cannot be improved within a short time.
- Company plants or major facilities have been loaned, or all or part of the company's major assets have been pledged, such that there is a likelihood of operational difficulties or suspension of operations, or any circumstance specified in a subparagraph of paragraph 1 of Article 185 of the Company Act occurs.
- The company enters into an important contract, changes major contents of the business plan, completes the development of a new product, acquires another enterprise, or signs or rescinds a cooperation plan with another company, and there is an adverse effect on the company's finances or business.
- Any instance of major disaster, protest, strike, or environmental pollution occurs and it is estimated that the business operations cannot be restored within a short time, or the estimated losses exceed 20% of the capital stock stated in the company's financial report, or NT$300 million or more.
- Other
- Elections for the directors/supervisors of the listed company cannot be held as schedule, or half or more of the original directors or supervisors cannot exercise their duties.
- A serious deficiency occurs in any stock-related operations of the listed company (such as fraud by company insiders), affecting the market order.
- Any matter involving litigious or non-litigious proceedings, an administrative disposition, or contentious administrative proceedings, with a material effect on the company's financial or business operations.
- Entering into an important contract, changing major contents of the business plan, or rescission of a cooperation plan with another company, with adverse impact on the company's financial or business operations.
- Reorganization or bankruptcy proceedings of the listed company, its parent company, or any of its subsidiaries, and any events that occur in the course of such proceedings, including any application made by the company, any petition made by an interested party and known to the company, any notification or ruling made by a court, or any other matters related to reorganization or bankruptcy proceedings duly conducted in accordance with laws and regulations.
- Any material default in connection with the listed company's stock.
- An unusual rise in the stock price after the company's initial listing.
- The listed company issues any material information, or there is reported in the media, any event with a material effect on company operations.
- There is any material irregularity in a transaction between the listed company and an affiliated enterprise.
- The stock price of the listed company has undergone a significant fluctuation in the most recent month, and the Market Surveillance Department of the TWSE has issued dispositive measures 2 or more times, and the sum of the number of borrowed shares at the TDCC plus the balance of shares purchased on margin accounts for 30% or more of the company's listed shares.
- The listed company enters into the TWSE's Market Observation Post System any material information that it is required to input into the system, or makes any large-scale revisions to information that it has entered into the system, and its average stock price of the three days following the entry differs by 14% or more from the average price of the three days preceding the entry.
- Combined sales of shareholdings by a managerial officer or officers of the listed company within a period of one month exceed 50%, and the number of shares sold exceeds 2,000 trading units.
- The internal control system of the listed company is found in an audit to have any material irregularity.
- The share ownership ratio of directors or supervisors falls short of requirements for 3 consecutive months or longer.
- Any independent director that the listed company appoints in accordance with regulations resigns for any reason other than a force majeure event such as illness or death, resulting in an insufficient number of independent directors or supervisors.
- Change of a financial officer, accounting officer, internal audit officer, R&D officer, or CPA of the company.
- In the current month, the cumulative number of shares on which any and all company insiders have created pledges reaches 50% or more of the shares held by all company insiders; or the reduction in shareholding of any and all company insiders exceeds 50% of the number of shares held by all company insiders.
- A company insider or insiders have submitted filings for the transfer of over 1,000 trading units of shareholdings, and the reason for the transfer is sale by the pledgee (liquidation of the pledge by a bank).
- The competent authority or the TWSE deems it necessary for any other reason.
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| Article 9 | In addition to provision by the listed company at its own initiative, the TWSE also collects information regarding material events from the following relevant sources:
- Mass media reportage.
- Letter from the competent authority.
- Financial reports that the listed company submits in accordance with Article 36 of the Securities and Exchange Act.
- Clear evidence provided by the listed company's trade association or investors.
- Matters disclosed by the listed company in accordance with The TWSE Procedures for Verification and Disclosure of Material Information of Companies with Listed Securities.
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| Article 10 | When any material event occurs to a listed company, in addition to conducting verification and public disclosure in accordance with the TWSE Procedures for Verification and Disclosure of Material Information of Companies with Listed Securities , the TWSE personnel responsible for handling the case shall look into and analyze the material event, collect relevant materials and ascertain the circumstances and progress of the case, and when necessary produce an analysis report (in the format in attachment 5-1). In all cases except those in which no irregularity is found through the above procedures, an on-site audit of the company shall be conducted. The personnel handling the case shall write a project report after the audit is complete, and the report content shall include the following items:
- The cause of the material event of the listed company.
- The impact of the material event on the listed company, and the group, industry, and market to which it belongs.
- The listed company's response measures.
- The CPA's opinions on relevant matters, when necessary.
- Any violation of securities-related laws or regulations found during on-site audit.
- The measures adopted by the TWSE.
- Suggestions for the competent authority.
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| Article 11 | When any material event occurs to a listed company, the TWSE, after looking into the circumstances in accordance with the preceding Article, shall conduct an on-site audit under regulation by exception. The auditing procedure are as follows:
- Appoint dedicated personnel to conduct the audit.
- Draft the key points for the audit and submit them to the competent authority for recordation.
- Conduct an on-site audit at the listed company.
- When any material irregularity is found during the audit, the case shall be reported to the competent authority via telephone or facsimile. If the audited company has violated any securities-related law or regulation, after the audit, a letter shall be sent to the listed company notifying it to make corrections. If the circumstances are serious, the TWSE may issue a letter requiring the listed company to send personnel to attend education classes held by an organization designated by the competent authority, and forward a copy of the letter to the organization. If the company does not send personnel to attend the classes, the TWSE may, depending on the nature of the deficiencies, list the company as a priority subject for auditing in subsequent substantive review of financial reports, routine regulation or regulation by exception, or internal control system audit.
- When necessary, [the TWSE] may ask the audited company to hire a CPA to conduct a special audit of the company's internal control system and produce an audit report.
- The special audit report shall be completed as soon as possible. If any irregularity is found, the report shall be submitted for review at the appropriate levels [within the TWSE], and then submitted case-by-case to the competent authority for further handling. Cases in which no irregularity is found may be submitted for review at the appropriate levels, and then compiled for regular submission to the competent authority for recordation.
- Audited companies shall be listed for a period of one year for test audit for the verification of material information at each quarter.
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| Article 12 | An audited company shall provide the materials required for routine regulation or regulation by exception in accordance with Article 47, paragraph 1, subparagraph 6 of the TWSE Operating Rules. If the audited company, without legitimate reason, does not provide relevant materials within the time limit, the TWSE may, depending on the seriousness of the circumstances, impose a monetary penalty on the audited company, or alter the trading method or suspend the trading of the listed securities in accordance with Articles 49 or 50 of the TWSE Operating Rules. Article 9 of the TWSE Procedures for Verification and Disclosure of Material Information of Companies with Listed Securities shall apply mutatis mutandis to the imposition of a monetary penalty.
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IV Supplementary Provisions |
| Article 13 | These Procedures shall come into force following submission to and approval of the competent authority.
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