Holding Foreign Companies Accountable Act - U.S-China

Why in news?

The US Senate recently passed a Bill by a unanimous vote that could delist some Chinese companies from selling shares on American stock exchanges.

What is the Bill about?

• The Bill is titled as ‘Holding Foreign Companies Accountable Act.’
• It is in relation to foreign companies that have been operating on US stock exchanges while flouting Securities and Exchange Commission (SEC) oversight.
• The Bill aims at protecting American investors and their retirement savings from this.
• The Bill must be passed by the House of Representatives and signed by US President Donald Trump before it becomes law.

What are the provisions?

• The Bill prohibits securities of a company from being listed on any of the US securities exchanges if the company fails to comply with the PCAOB audits for 3 years in a row.
• [The Public Company Accounting Oversight Board (PCAOB) was set up to inspect audits of public companies.
• This is to ensure that the information companies provide to the public was accurate and trustworthy.]
• The Bill also requires public companies to disclose whether they are owned or controlled by a foreign government including China’s Communist government.

What is the need now?

• Many Americans invest in US stock exchange as part of their retirement savings.
• According to the SEC, over 224 US-listed companies are located in countries where there are obstacles to PCAOB carrying out audits.
• These companies have a combined capitalisation of over $1.8 trillion.
• Dishonest companies operating on the exchanges put Americans at risk.
• This legislation protects the interest of hardworking American investors.
• It ensures that foreign companies traded in America are subject to the same independent audit requirements that apply to American companies.
• Significantly, Chinese companies traded in the US have routinely avoided the SEC’s rigorous company-specific disclosure and audit regulations.
• The Chinese government refuses to allow the PCAOB to inspect audits of companies that are registered in China and Hong Kong.
• This poses a substantial risk to Americans who want to invest in such companies.
• Moreover, in the last 10 years, an increasing number of Chinese companies are listing themselves on US stock exchanges.
• Most recently, the shares of the Chinese company Luckin Coffee dropped after an accounting fraud came to light.
• In April 2020, the company’s shares dropped by over 80% after fake transactions to the tune of $310 million were revealed.
• [China’s Luckin Coffee is considered to be a competitor of the American coffee chain Starbucks.]

What does this mean for Chinese companies?

• While the Bill applies to all foreign companies, it is targeted specifically at China.
• The Bill offers a level playing field and gives investors the transparency they need to make informed decisions.
• In order to comply with the requirements of the Bill, Chinese companies may have to break state secret laws in China.
• Therefore, the Bill might be a way to encourage the Chinese government to take a re-look at its laws.
• Also, the move comes amidst rising tensions between the two countries over the COVID-19 pandemic.

What are the other China-related bills in the US?

• This is not the first time the US has passed a Bill targeting China.
• In November 2019, the House of Representatives approved the Senate’s version of the Bill titled, ‘Hong Kong Human Rights and Democracy Act.’
• This required the US Secretary of State to annually certify if Hong Kong retains enough autonomy to be eligible for special treatment by the US.
• As per the Bill, the US can also impose sanctions on individuals responsible for human rights violations in Hong Kong.
• As of November 2019, over 150 China-related legislations were pending in the US with the aim to counter Beijing.
• The subjects of these legislations include the mass internment of Uygurs, cyber-security and Taiwan and the South China Sea among others.

Source: Indian Express