Caixin
Dec 30, 2019 08:28 PM
FINANCE

Amended Securities Law Greenlights Market-Driven IPO System

The most high-profile revision involves a fundamental shift in the system for companies seeking to list on any of the country’s stock exchanges.
The most high-profile revision involves a fundamental shift in the system for companies seeking to list on any of the country’s stock exchanges.

China’s lawmakers have passed long-awaited amendments to the country’s Securities Law, providing financial markets with a more comprehensive and appropriate legal framework that will finally open the door to an overhaul of the initial public offering (IPO) system for stocks.

The changes were approved (link in Chinese) on Saturday by the standing committee of the National People’s Congress (NPC), the legislature, at the fourth and final reading, and the amended law will go into effect on March 1, 2020. This is the second comprehensive revision to the Securities Law since it was first enacted in 1999, when the country’s financial markets were in their infancy. The first major amendments went into effect in 2006, but since then there have only been small tweaks, which have not been enough to keep up with rapid changes in the equity and bond markets and investors’ demands for more clarity and protection.

It has taken almost five years for the latest amendments (link in Chinese) to wind their way through the legislative process as some of the more controversial changes proposed in the law were debated and modified.

“In the process of formulating and amending the securities law, there has always been one central theme – to stick to the direction of reform, which is marketization and rule of law,” Wang Xiang, deputy director of the Economic Law Department at the Legislative Affairs Commission of the NPC Standing Committee, said at a press briefing (link in Chinese) in Beijing on Saturday. “On the other hand, through legal liability and punishment, (we can) crack down on securities violations, increase the cost of illegal activities, and strive to create a clean market environment and severely deter violations.”

Market-driven IPOs

The most high-profile revision involves a fundamental shift in the system for companies seeking to list on any of the country’s stock exchanges. The current procedure, which has been criticized for its lengthy and bureaucratic approval process, is being scrapped and will be replaced by a registration-based mechanism where the timing and pricing of an IPO is driven by market participants including investors, advisers and listing candidates.

The amended law has looser profitability criteria for IPO candidates but stricter information disclosure requirements. It will also provide more protection for investors and impose harsher penalties on issuers who violate regulations.

The system has already been trialed in the new STAR Market, a Nasdaq-style board for companies involved in technology and other emerging high-growth industries that opened in July.

Under the new framework, the China Securities Regulatory Commission (CSRC) will no longer be responsible for approving IPOs, only deciding whether to register them, and stock exchanges will be responsible for reviewing listing applications. The revised law also scraps a requirement that companies have to be profitable to sell shares to the public through an IPO.

The revised law also stipulates financial penalties for law violations. IPO candidates found to have carried out fraud during the process of issuing shares but that have not yet sold stock to investors will face a fine of 2 million yuan ($286,300) to 20 million yuan. Companies who have already issued shares will be subject to a fine of 10% to 100% of the value of the funds they raised illegally, Wang said. That compares with a fine of 1% to 5% under current regulations.

Controlling shareholders involved in issuing false statements will be subject to a fine of 10% to 100% of the value of the funds raised through the IPO, according to the revised law. If no funds have been raised or the amount raised is less than 20 million yuan, shareholders will be subject to a fine of 2 million yuan to 20 million yuan.

Investors, especially small and individual shareholders, will get more protection under the revised law, Gong Fanrong, a member of the NPC's Financial and Economic Affairs Committee, told reporters. It lays out a framework that allows them to initiate class action lawsuits by forming a group of at least 50 investors, who can appoint an investor protection body to represent them in any legal action against a company.

Shareholders will be divided into “ordinary investors” and “professional investors,” a status that will be determined by the securities watchdog and based on factors including the value of their property and financial assets, their investment knowledge and experience, as well as professional competence.

The revised law also loosens administrative controls over intermediaries and professional services businesses such as accounting firms, who will no longer need approval from the Ministry of Finance and the CSRC to provide securities-related services, but instead will only need to register with them.

Tang Ziyi contributed to this report.

Contact reporter Timmy Shen (hongmingshen@caixin.com, Twitter: @timmyhmshen)

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