Dec 24, 2019 07:07 AM

Broader IPO Revamp, Tougher Penalties Proposed in Securities Law Revisions

A revision to China’s Securities Law is under a fourth reading by top legislators.
A revision to China’s Securities Law is under a fourth reading by top legislators.

Chinese lawmakers are taking the opportunity of the latest revisions to the country’s Securities Law to lay legal grounds for a full revamp of the stock listing system, tougher penalties on market violations and class actions in securities litigation as years-long efforts to amend the law reach the final stage.

A latest draft of the revised Securities Law was submitted Monday to the bimonthly session of the National People's Congress (NPC) Standing Committee, China's top legislature, for a fourth reading, which is expected to be the final review of the changes. Once passed, the new Securities Law may be enacted as soon as the end of this year, analysts said.

Plans to update the Securities Law, promulgated in 1999, to better adapt to the changing market were first put in place in 2014. But efforts bogged down in the review process due to market fluctuation, including the 2015 stock market meltdown. The pace has picked up this year, especially after the previous review in August, fueling expectations that the new law will soon be finalized.

The NPC’s Constitution and Law Committee Monday proposed to the Standing Committee new changes in the draft revisions, including terms to expand a registration-based initial public offering (IPO) system, broaden the definition of securities and impose harsher punishments on market misconduct, state media reported.

The committee suggested revising terms related to the listing procedure based on a registration system and remove requirements for companies to obtain listing approval. The new law should also pave the way to gradually expand the registration-based IPO system to all markets in the country, according to the committee.

A revamp of China’s lengthy and bureaucratic IPO approval system has been a key issue to be addressed in the updated Securities Law. The new Nasdaq-style high-tech board launched in Shanghai earlier this year set off a trial of a registration-based listing system. The draft revision submitted for the third review in April added a new section addressing special requirements for going public on the new high-tech board to create the legal grounds for the pilot program, although the new section was lacking specific details.

In the Monday report, the Constitution and Law Committee proposed changes to some terms regarding the listing system in the previous draft to enable an expansion of the listing reform. The committee suggested clarifying that companies should be eligible to list as long as they can prove business sustainability, replacing previous stringent profitability requirements.

The revisions will also terminate the regulatory approval committee for IPOs and authorize stock exchanges to review listing applications. Companies will be subject to stricter disclosure requirements under a registration-based system, and the State Council will decide the steps for the new listing system to be expanded nationwide.

The lawmakers also suggested tweaks in the definition of securities to clarify what businesses are subject to the law. Asset-backed securities and asset management products will be covered by the law while securities derivatives will be removed, according to the committee. Caixin learned that some experts have suggested that securities derivatives should be regulated by a separate Trust Law, which is being drafted.

The Constitution and Law Committee also proposed to adding a provision in the amendment to allow the law to be exercised on overseas securities trading activities that disturb domestic market order and hurt onshore investors’ interests, a move that will empower Chinese regulators’ long-arm jurisdiction in overseas securities trading, said Peng Bing, a law professor at Peking University.

The final revisions to the Securities Law are likely to further toughen punishments for market violations compared with the previous draft as the lawmakers proposed to raise the maximum penalties to as much as 20 million yuan ($2.9 million) based on the charges. The previous draft submitted for review in April already increased penalties on companies to as much as 10 million yuan from the current limit of 600,000 yuan.

The revisions may also pave the way for China to test its own class action mechanism in securities litigation to protect investors’ interests as lawmakers suggested adding provisions that would allow investors to act in groups to seek compensation for stock market violations through civil lawsuits.

Class actions are rarely adopted in China’s civil litigation due to their complexity, said Tang Xin, a law professor at Tsinghua University. Such actions require the capacity of courts to handle complicated cases, maintaining a delicate balance among parties while ensuring justice, Tang said.

Contact reporter Han Wei (

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