Securities law of the PR 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, which came into effect on 1 March 2020.

The revision of the Securities Law improves the basic systems of the securities market and reflects the general direction of marketization, legalization and internationalization. It provides strong legal guarantees and comprehensively deepens 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.

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. A series of new rules have been made following an in-depth analysis of the securities market’s operating laws and developmental characteristics.

The securities issuance registration system

Following the Shanghai Stock Exchange’s experience of setting up the Science and Technology Innovation Board and piloting the registration system, the revised Securities Law implements:

• the relevant requirements of the Third Plenary Session of the 18th Central Committee on the reform of the registration system; and
• the relevant requirements of the Fourth Plenary Session of the 19th Central Committee on the improvement of the basic system for capital market.

In order to fully implement the registration system, the Securities Law systematically modifies the securities issuance system, reflecting 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.

The revised Securities Law significantly increases violations costs for securities and greatly increases the penalties for illegal conduct:

• for fraudulent issuances, the fine increases from the original maximum of 5 per cent 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 to 10 million CNY; and
• 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 million CNY.

The revised Securities Law has improved civil liability for securities violations. For example, the issuer assumes civil liability for a failure to perform public commitments. The issuer’s controlling shareholder and actual controller are presumed to be jointly responsible for fraudulent issuance, information disclosure violations and so on.

It also improves investor protection. The revisions establish a special chapter stipulating the investor protection system. This includes:

• distinguishing between ordinary investors and professional investors, and thus stipulating protection arrangements for different interests;
• establishing a collection system for the exercise of the rights of listed companies’ shareholders;
• stipulating a system of bondholder meetings and bond trustees;
• establishing a compulsory mediation system for disputes between ordinary investors and companies; and
• improving the cash dividend system of listed companies.

In order to meet the needs of the reform of the securities issuance registration system, the revision explores a securities civil litigation system that adapts to China’s national conditions. This provides that investor protection institutions can act as litigation representatives, filing civil damages lawsuits for injured investors in accordance with the ‘explicit withdrawal’ and ‘implicit participation’ litigation principles.

Information disclosure requirements

The revisions to the Securities Law have significantly improved the information disclosure system. The changes include:

• expanding the scope of the information disclosure obligor;
• improving the content of information disclosures;
• emphasizing that the information necessary for investors to make value judgements 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; and
• establishing an information disclosure system for the issuer and its controlling shareholders, actual controllers, directors, supervisors and senior management personnel to make public commitments.

Securities trading

The revisions:

• optimize the provisions on listing conditions and delisting conditions;
• strengthen legal prohibitions on insider trading, market manipulation and use of undisclosed information;
• strengthen the real-name system requirements for securities transactions, ensuring that no company or individual may violate the regulations, lend securities accounts or borrow others' securities accounts to engage in securities trading;
• improve the shareholding reduction system of listed companies;
• stipulate securities trading suspension and resumption systems, and programmatic trading systems; and
• improve the stock exchange's measures to prevent and control market risks and maintain trading order.

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 also removes the qualification approval for directors, supervisors and senior management personnel of securities companies and adjusts the supervision for securities service agencies, such as accounting firms, from a qualification approval system to a record system. It also changes the China Securities Regulation Commission (CSRC)-approval tender offer exemption in agreement takeover to exemption in accordance with CSRC rules.

The new law stipulates that securities companies shall not allow others to directly participate in the centralized trading of securities in their name. It clearly ensures that the sponsors, underwriting securities companies and 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.

Multilevel capital markets

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.

It stipulates that stock exchanges and 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; and authorizes the State Council to formulate management measures for national stock exchanges and regional equity markets.

Law enforcement and risk control

The revisions clarify 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 can take regulatory measures to prevent market risks and maintain market order; adds an administrative reconciliation system and an integrity file system for the securities market; and improves the securities market ban system, which stipulates that entities subject to a market ban shall not engage in securities trading within a certain period.

Furthermore, the new revision expands the applicable scope of the Securities Law. It defines depository receipts as statutory securities, brings asset-backed securities and asset management products under the remit of the Securities Law, and 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 taking place outside China, but which disrupt the domestic market order and damage the legitimate rights and interests of domestic investors, shall assume liabilities in accordance with the Securities Law.

Finally, the revisions have 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.

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 further deters violation of laws and regulations and better protects the rights of small and medium investors in the Chinese securities market. It constitutes a good legal foundation for China to further develop a healthier and more efficient capital market systems.