Securities Law revision likely later this year

China is likely to adopt the revised Securities Law by the end of the year, in a move to lay the legal foundations for capital market reforms prioritizing the registration system, experts said.

The revised law is expected to feature intensified investor protection and a crackdown on breaches by listed companies, and should be formulated to nurture a stronger capital market, they said.

Revising the Securities Law has been listed in this year's legislative plans, according to the Standing Committee of the National People's Congress, China's top legislative body. During the annual meeting of the NPC in March, five motions to revise the Securities Law were submitted to the NPC for deliberation.

Li Chao, vice-chairman of the China Securities Regulatory Commission, the top securities regulator, said piloting the registration system requires the revision of the Securities Law and the Criminal Law. He made the remarks at the Boao Forum for Asia on March 29.

The moves show that China has expedited work to revise the fundamental law governing the capital market, which is of "great urgency and necessity", said Wang Tingting, an associate professor of finance at the Central University of Finance and Economics in Beijing.

On the one hand, registration system reform requires the Securities Law to provide legal grounds for this reform and to strengthen information disclosure rules, Wang said.

China has pushed forward efforts to launch the science and technology innovation board which will pilot the registration system, and the market expects the new stock trading platform to be launched around the middle of this year.

"Compared with the approval system currently adopted by the A-share market, the registration system will rely more on the market to judge the value of listed firms. This means related provisions must be revised to ensure investors are well-informed," Wang said.

On the other, the current version is too outdated to regulate the market effectively, said Wang. "After taking effect in 1999, the Securities Law has not seen systematic re-examinations, despite the revision in 2005 and several minor amendments."

Liu Junhai, director of the Business Law Center at Renmin University of China, expects the revised law to be adopted by the end of the year, after no more than two rounds of deliberation by the top legislature.

The revised draft was reviewed twice in 2014 and 2017.

"The key role of the revised law will be building an investor-friendly legal system, as the relatively weak investment function of China's capital market has dampened its efficiency and attraction." That entails strengthened investor protection and more stringent punishment of listed firms’ legal breaches, Liu said.

During a high-profile meeting in February, President Xi Jinping said efforts should be made to address the current situation where the costs of legal and regulatory breaches in the financial sector, especially in capital markets, are too low.

Zhu Jiandi, an NPC deputy and chief partner of BDO China Shu Lun Pan CPAs, a major domestic accounting firm, submitted a motion to raise the fine for noncompliance with information disclosure rules during this year’s annual meeting of the NPC.

According to Zhu, the current Securities Law sets the maximum fine faced by a listed company engaging in a financial fraud at 600,000 yuan ($89,300)－far less than the potential illegal benefits－and thus cannot well deter violations and protect investors' rights.
Hong Rong, founder of Shanghai-based investor education platform Hongda Education, said the top priority of the updated law should be nurturing a stronger capital market to better serve the real economy.

"For this purpose, current provisions that have constrained development of the market should be removed," Hong said.

Specifically, Hong said the current law imposes much stricter regulations on the securities industry than in mature capital markets. This has made it hard for core market intermediaries to innovate and become more capable.

The revised law is likely to and should grant securities firms the right to manage clients’ settlement funds, giving them greater freedom to manage clients' wealth and more flexibility in establishment, Hong said.

"Meanwhile, the revised law should leave room for the future development of the capital market," Hong said.

Such arrangements include allowing foreign companies to go public on the domestic capital market, Hong said. "These situations have not taken place yet, but the law should be oriented toward this in the future."