China: Fundamental Changes of the 2006 PRC Securities Law

Last Updated: 20 March 2006

Introduction

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.

Main Amendments

"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.

Sponsor System

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.

Conclusion

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.

Further Information

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions