February 25, 2020
Revised Act forms legal basis for nation to improve transparency and fairness of sector, enhance investor confidence.
The revised Securities Law, which becomes effective on Sunday, will lay a solid foundation for China’s capital markets to become more market-oriented and rules-based, analysts said.
The new law will set the legal basis for the country to adopt a market-based initial public offering system and abolish administrative approval for issuing new shares.
It will also step up punishment for rule violations, enhance protection for investors’ rights and interests, and substantially raise the cost companies and individuals will face if they engage in illegal activities such as financial fraud, insider trading and market manipulation, they said.
The adoption of the long-awaited law will help improve the transparency and fairness of the Chinese capital market and boost investor confidence in a market that has experienced illegal activities and unfair market practices, the analysts added.
“The revised Securities Law marks a crucial step by China on the way to developing a more market-oriented and rules-based capital market and it will have a substantial effect on the Chinese capital market,” said Wang Yang, a researcher of finance at the Development Research Centre of the State Council, China’s Cabinet.
Yi Huiman, chairman of the China Securities Regulatory Commission, the country’s top securities watchdog, said the adoption and implementation of the new securities law marks a new milestone in the development of the country’s capital markets.
The law helps improve and consolidate the basic system of the Chinese capital market and provides a crucial legal base for the country to further deepen key market-based reforms such as implementing the registration-based IPO system which has become a top priority, Yi said during a recent interview with Xinhua News Agency.
The CSRC will draft and revise relevant supporting regulations and documents in accordance with the revised Securities Law as its implementation requires formulating and modifying a large number of supporting provisions to further improve the capital market regulatory system, Yi said.
It was not plain sailing for the country’s lawmakers to revise the Securities Law. The original law was in need of comprehensive revision as many provisions no longer fit the country’s rapidly developing capital market and fall short of addressing acute legal issues facing the market.
The revision work began in 2013. The legal process came to a standstill in the summer of 2015 as the A-share market was hit by sharp volatility.
The market turbulence prompted the securities regulator and lawmakers to suspend the launch of the registration-based IPO system as they worried that the market would face greater pressure from a possible increase of new IPOs.
The legal effort resumed after President Xi Jinping announced in November 2018 that the country would experiment with the registration-based IPO system at the technology-focused STAR Market on the Shanghai Stock Exchange.
After six years entailing four rounds of review and deliberation, the lawmakers finally approved and adopted the revised Securities Law in December. It was hailed by investors and industry experts as a milestone event in the history of China’s capital markets.
Key features of the new law include provisions to expand the registration-based IPOs to the wider marketplace, stricter information disclosure requirements, and tougher penalties for rule violations.
The revised law substantially raises the maximum punishment for violations of information disclosure requirements to 10 million yuan ($1.44 million), from 600,000 yuan in the previous law.
Xue Yi, a professor of finance at the University of International Business and Economics, said that enhanced regulations, the emphasis on market transparency and information disclosure, and the increased penalties will help boost investor confidence and should lift the market’s attraction to more institutional investors in the long run.
“In the past, low penalty for committing a crime has undoubtedly encouraged the occurrence of illegal activities and resulted in some serious law violations with a bad social impact,” Xue said.
Chinese pharmaceutical firm Kangmei Pharmaceutical engaged in one of the country’s largest financial frauds totaling $12.7 billion last year. The company’s stock price plunged by more than 75 percent in less than two months, causing huge losses to investors.
Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, said the biggest breakthrough of the revised law is the legalisation of the registration-based IPO system.
“The law systemically improves the fundamental system of the Chinese capital market, underscoring the country’s determination to deepen capital market reform,” Dong said.
The successful experience of the IPO reform at Shanghai’s STAR Market has made lawmakers and the regulator confident of expanding the reforms gradually to the entire market, he said.
The law authorized the State Council to implement the new share sale system step by step, which will help maintain market stability, Dong added.
Shenzhen’s startup board ChiNext is expected be the next market to adopt the registration-based IPO system this year based on Shanghai’s successful experience.
Jack Lee, head of China A-share research at global asset manager Schroders, said in a research note that the registration-based IPO system and increasing the penalties for securities violations will help promote the legalization and marketization of China’s capital market.
“In the long run, the better regulated capital market will improve the quality of listed companies and ultimately create better value for investors,” he said.
The revised Securities Law will also enhance the regulator’s capability to carry out law enforcement measures and to better contain financial risks, which have been listed as one of the key priorities and main objectives of the CSRC this year.
Liu Junhai, director of the Business Law Center at Renmin University of China, said that the revised law will help improve corporate governance and encourage more quality companies to raise funds from the market, which in turn will boost the capital market’s role of serving the economy.
The law removed the requirement of continued profitability for companies to be eligible for issuing securities, which made the market more inclusive for companies with various business models and will enable them to focus on improving their competitiveness and creating long-term value for investors, Liu said.
Analysts believe the revision of the law is also a positive development for China’s rapidly growing bond market, which is already the world’s second-largest.
Deng Bowen, an analyst with China Lianhe Credit Rating Co Ltd, said in a research note that the new law simplified the process for bond issuance and strengthened information disclosure regulations. This will enable the bond market to better serve the economy and accelerate the market’s development into becoming more market-oriented and internationalised.