The recent amendments to the PRC Securities Law issued on 27 October 2005 and effective on 1 January 2006, revise a stunning 40% of the original provisions and involves amendments to more than 100 articles. The New Securities Law is the first major amendment since 1998 and aims to enhance the development of the Chinese securities and capital market by increasing significantly provisions relating to protection of investors’ rights, improve corporate governance and penalties for various violations.
This short summary intends to provide an overview of these significant changes by highlighting some of the differences between the Old Securities Law and the New Securities Law.
"Public Offerings" Defined
The New Securities Law sets out a definition of "public offering" and stipulates that any of the following acts shall be deemed a public offering: issuance of securities to non-specific target people, issuance of securities to more than 200 specific people, or other issuance activity as stipulated by laws or regulations. The New Securities Law forbids issuers from using advertisements, public persuasion, or other disguised public means to conduct private offerings.
Scope of Securities
Neither the Old nor the New Securities Law accurately define what constitutes securities. However, Article 2 of the New Securities Law appears to expand the applicability of the regulations not only to stocks and corporate bonds but also to government bonds, investment fund units and securities-related derivatives. It should be noted that the applicability of the New Securities Law to any newly effected categories of securities is still subject to separate confirmation by the State Council.
The New Securities Law also formalizes the "sponsor system" and requires companies to retain qualified sponsors to issue sponsor letters both for the issuance of stocks or corporate bonds and for the listing of stocks or corporate bonds on stock exchanges. The New Securities Law also sets down a 3 month time limit for the China Securities Regulatory Commission ("CSRC") to make a decision whether to approve issuance applications or not and a 6 month time limit for the examination and approval of applications for establishment of securities companies.
Improved Listing Procedures and Criteria
The New Securities Law makes substantial changes to the administration of securities listings and lowers the criteria for both the listing of stocks and corporate bonds on stock exchanges. Under the Old Securities Law rules, the listing of stocks had to be approved by the CSRC and the listing of corporate bonds approved by stock exchanges according to legal requirements and procedures. The New Securities Law now requires that securities listing applications must be submitted to stock exchanges for approval according to law, and applicants must sign listing agreements with stock exchanges after approval.
The New Securities Law also lowers the capital requirement for listing of stocks from RMB 50 million to RMB 30 million and removes such restrictions as having more than 3 years’ operating history, profit-making history for 3 consecutive years and having more than 1000 shareholders respectively holding more than RMB 1000 face value shares.
Enhanced Protection for Small Shareholders
To enhance the protection of small shareholders, the New Securities Law empowers shareholders to directly bring a lawsuit in their own name if the board of directors fails to take back, within 30 days after being requested by the shareholders, the incomes of directors, supervisors, senior managers, or shareholders holding more than 5% of the company's stocks, which are derived from such persons’ short-term trading in the company’s stocks within 6 months.
Stricter Director’s Liability
The New Securities Law requires directors and senior managers of listed companies to sign written confirmations on periodic reports of listed companies and the board of supervisors to issue written opinions on the periodic reports compiled by the board of directors. All directors, supervisors and senior managers of a listed company must guarantee the truthfulness, accuracy and completeness of the disclosed information. If there are false or misleading statements or material omissions in the prospectus, financial statements, periodic or temporary reports, which cause loss to investors, the issuer/listed company will be liable for compensation, and the directors, supervisors of the issuer/listed company and other relevant securities intermediaries, assume joint and several liability, unless they can prove they did not commit any wrongdoing.
Liabilities of Securities-Related Persons Broadened and Strengthened
Under the New Securities Law, individual investors may sue insider traders directly. At the same time, liable entities are broadened to include sponsor companies, investment consultation entities, and acquisition companies as well as offering companies, securities companies, and stock exchanges. Individuals who may be liable are extended to actual controllers, controlling shareholders, and in some cases, even ordinary employees of such entities. Further, penalties are detailed and strengthened. More than half of such punishments have an alternative of disqualifying liable persons, with one such article including life disqualification for individuals.
New powers of the CSRC
In cases of suspected illegal activity, the CSRC is now empowered to freeze individual or corporate capital, securities, and bank accounts rather than being required to obtain a court order to freeze such assets. The CSRC also has the power to suspend for up to 15 days the trading activity of persons suspected of stock manipulation or insider dealing. If the CSRC determines that a case qualifies as "complicated", it may suspend an individual's activities for more than 15 days.
Counterbalancing these new powers, the CSRC must assign at least 2 people to an investigation. A company or individual may lawfully refuse to cooperate with an investigation if the CSRC fails to meet this new requirement.
Derivatives related to Securities
The Old Securities Law only permitted spot trading of securities, while Article 42 of the New Securities Law provides that securities may be traded on a spot basis or by other means as stipulated by the State Council. This implies that the State Council may formulate rules for trading securities on a forward basis. In addition, the State Council may formulate administrative measures on issuance and trading of securities-related derivative products. All of these changes have paved the way for securities-related derivative transactions.
Over the counter traded securities
Pursuant to the Old Securities Law, securities had to be offered and traded on legally established stock exchanges. The New Securities Law has amended these provisions to the effect that publicly issued securities may be traded on legally established stock exchanges and in such other places as stipulated by the State Council. This amendment implies the possibility that securities can be traded on an over the counter basis, which will meet the needs of the market.
Further Uncertainties – Foreign Companies
Unfortunately, some of the issues in connection with identities of securities issuers that have long been discussed in the past are still left open to further dispute. It is still unclear whether a foreign entity is allowed to offer, publicly or privately, securities in the PRC under the New Securities Law. It appears that there is no breakthrough in this regard and, therefore, a foreign entity may not offer securities within the PRC unless and until expressly permitted by applicable laws or regulations or specific approvals are granted by the relevant PRC authorities.
The New Securities Law clearly improves the previous version by introducing more definitions and clarifications of previous uncertainties, broadening and specifying the powers of the CSRC and also by strengthening the penalties and controls for violations of its regulations. However, implementation of most of these reforms is left to the discretion of the State Council to promulgate specific regulations.
For more information on the above issues, or if you have any questions in relation to other China related matters, please contact our China Practice Group.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.