The Highlights of the new Securities Law of China
On 28 December 2019, the 15th Meeting of the Standing Committee of the 13th National People's Congress adopted revisions to the Securities Law of the People’s Republic of China (the “Securities Law”), which became effective on 1 March 2020. Here Ms Zhu Ning, Managing Partner from Alliott Group's law firm member in Beijing, Chance Bridge Partners updates us on proceedings.
On 28 December 2019, the 15th Meeting of the Standing Committee of the 13th National People's Congress adopted revisions to the Securities Law of the People’s Republic of China (the “Securities Law”), which became effective on 1 March 2020. This revision of the Securities Law further improves the basic system of the securities market, and reflects the direction of marketization, legalization and internationalization. It provides strong legal guarantees for comprehensively deepening reform of the securities market, prevention and control of market risks, improvement of listed companies’ quality and protection of investors’ rights and interests. It also promotes the functioning of the securities market to serve the real economy, and helps to create a standardized, transparent, open, dynamic, and resilient capital market and thus has very important and far-reaching significance.
This revision of the Securities Law systematically summarizes the practical experience of China’s securities market reform and development, regulatory enforcement and risk prevention and control. Based on an in-depth analysis of the securities market’s operating laws and developmental characteristics, a series of new rules have been made as follows:
1. It fully implements the securities issuance registration system
On the basis of summarizing the experience of the Shanghai Stock Exchange in setting up the Science and Technology Innovation Board and piloting the registration system, this revision implements the relevant requirements of the Third Plenary Session of the Eighteenth Central Committee on the reform of the registration system and the Fourth Plenary Session of the Nineteenth Central Committee on the improvement of the basic system for capital market. In order to fully implement the registration system, it systematically modifies the securities issuance system, which fully reflects the determination and direction of the registration system reform. At the same time, considering that the registration system reform is a gradual process, this revision also authorizes the State Council to stipulate the specific scope and implementation steps of the securities issuance registration system, leaving the necessary gaps for the step-by-step implementation of the registration system for relevant sectors and securities types.
Secondly, it significantly increases violations costs for securities. This revision has greatly increased the penalties for illegal conducts. For fraudulent issuances, the fine increases from the original maximum of 5% of the raised funds to double the amount of raised funds; for listed companies’ information disclosure violations, the maximum fine increases from the original 600,000 yuan to 10,000,000 yuan; for the issuer's controlling shareholder or the actual controlling organization instructing to engage in false statements or concealing related matters resulting in false statements, the maximum penalty is 10,000,000 yuan. At the same time, it has also improved the civil liability for securities violations. For example, the issuer will assume civil liability for failure to perform public commitments. The issuer’s controlling shareholder and actual controller are presumed to be jointly responsible for fraudulent issuance and information disclosure violations, etc. At the same time, it improves the investor protection system. This revision establishes a special chapter stipulating the investor protection system, which makes many highlight arrangements. It includes distinguishing between ordinary investors and professional investors and thus stipulating different interests protection arrangements; establishing a collection system for the exercise of the rights of listed companies’ shareholders; stipulating a system of bondholder meetings and bond trustees; establishing compulsory mediation system for disputes between ordinary investors and securities company; improving the cash dividend system of listed companies. It is particularly worth noting that in order to meet the needs of the reform of the securities issuance registration system, this revision explores a securities civil litigation system that adapts to China’s national conditions, which provides that investor protection institutions can act as litigation representatives and file civil damages lawsuits for injured investors in accordance with the "explicit withdrawal" and "implicit participation" litigation principles.
2. It further strengthens information disclosure requirements
This revision establishes a special chapter stipulating the information disclosure system, which has systematically improved the information disclosure system. It Includes expanding the scope of information disclosure obligor; improving the content of information disclosure; emphasizing that the information necessary for investors to make value judgments and investment decisions should be fully disclosed; regulating the voluntary disclosure behavior of information disclosure obligors; clarifying that listed company acquirers should disclose sources for buying additional shares; establishing an information disclosure system for the issuer and its controlling shareholders, actual controllers, directors, supervisors, and senior management personnel to make public commitments, etc.
3. It improves the securities trading system
This revision optimizes the provisions on listing conditions and de-listing conditions; improves the legal prohibitions on insider trading, market manipulation and use of undisclosed information; strengthens the real-name system requirements for securities transactions, and no company or individual may violate the regulations, lend securities accounts or borrow others' securities accounts to engage in securities trading; improves the shareholder shareholding reduction system of listed companies; stipulates securities trading suspension and resumption systems and programmatic trading systems; improves the stock exchange's measures to prevent and control market risks and maintain trading order.
4. The "delegated service" requests cancellation of the relevant administrative license has been implemented and the new instrument consolidates the legal duties of the intermediary agency market as “gatekeeper”
This revision includes the cancellation of the qualification approval for directors, supervisors and senior management personnel of securities companies; adjustment of the supervision for securities service agencies such as accounting firms, from qualification approval to record system; change of the CRSC-approval tender offer exemption in agreement takeover to exemption in accordance with rules of CRSC. The new law stipulates that securities companies shall not allow others to directly participate in the centralized trading of securities in their name; clearly ensures that the sponsors, underwriting securities companies and their directly responsible personnel failing to perform their duties shall assume the presumed liability for joint compensation of the injured investors. The range of illegal penalties for service agencies that fail to perform their due diligence obligations increases from a maximum penalty of five times the business income to ten times. If the circumstances are serious, they shall be suspended or prohibited from engaging in securities service business.
5. It establishes a multi-level capital market system
This revision divides stock exchanges into three levels: stock exchanges, other national stock exchanges approved by the State Council, and regional equity markets established in accordance with State Council regulations; stipulates that stock exchanges, other national stock exchanges approved by the State Council can establish different market levels; clarifies that non-publicly issued securities can be transferred at the aforementioned stock exchanges; authorizes the State Council to formulate management measures for national stock exchanges and regional equity markets, etc.
6. It strengthens law enforcement and risk control
This revision clarifies the responsibility of the CSRC to monitor, prevent and deal with securities market risks in accordance with law; extends the period for the CSRC to freeze and seal off illegal funds and securities during law enforcement; stipulates that the CSRC takes regulatory measures to prevent market risks and maintain market order; adds an administrative reconciliation system and an integrity file system for the securities market; improves the securities market ban system, which stipulates that entities subject with market ban shall not engage in securities trading within a certain period. Furthermore, the new revision expands the applicable scope of the Securities Law and defines the depository receipts as statutory securities, makes asset-backed securities and asset management products into the Securities Law, as well as authorizes the State Council to stipulate the management methods for the issuance and trading of asset-backed securities and asset management products in accordance with the principles of the Securities Law. At the same time, considering the practical needs of cross-border supervision in the securities field, it clarifies that securities issuance and trading activities outside the country that disrupt the domestic market order and damage the legitimate rights and interests of domestic investors shall assume liabilities in accordance with the Securities Law.
Except for the abovementioned highlights, this revision has also improved the acquisition system for listed companies, the business management system for securities companies, the securities registration and settlement system, and the cross-border supervision and coordination system.
Through the design of the top-level system, the new Securities Law clarifies the boundaries of rights and obligations of different market entities, which is conducive to promoting the respective responsibilities of securities market entities. At the same time, it increases the deterrence of violations of laws and regulations. A much stronger legal protection of the rights of small and medium investors in the Chinese securities market has been addressed. The new Securities Law constitutes a good legal foundation for China to further develop a more healthy and efficient capital market system.
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