Revised law to deepen capital market reform

Registration-based system, stricter disclosure rules among amendments

China has laid the cornerstone to build a capital market that is more capable of serving the real economy via revisions to the Securities Law, with breakthroughs in deepening market-oriented reforms and intensifying a crackdown on illegal market behavior, experts said.

The revision made systemic amendments to gradually implement the registration-based new share sales system across the whole A-share market, and will take effect on March 1, according to the Standing Committee of the National People's Congress, the country's top legislature.

The committee voted to adopt the revised law on Saturday, after the fourth review of the draft revision during a six-day session.

"The revised law made it clear that the registration-based system will entirely replace the approval-based system, and not merely in one or two pilot submarkets," said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology.

"This should be the biggest breakthrough of the revised law, and it is a significant milestone in China's capital market reforms," Dong said.

The revision abolishes the system of requiring a committee review of public offerings — in which the securities regulator reviewed public offering applications — and instead authorized stock exchanges to review the applications. The securities regulator will instead be responsible for registration of securities.

It also made information disclosure requirements stricter and streamlined requirements for issuing securities.

Implementing the registration-based system is of great importance because it will drive a slew of market-oriented reforms that are intended to elevate the efficiency of resource allocation, boost the quality of listed firms and remove bottlenecks weighing on market performance over the long run, Dong said.

The revision authorized the State Council, China's Cabinet, to decide the scope and steps of registration-based reform, allowing phase-in reforms and a smooth transition.

"The China Securities Regulatory Commission will fully consider the actual situation of the market, and, especially, coordinate securities issuances, securities registrations and the market capacity to absorb the reforms," said Cheng Hehong, director of the Department of Legal Affairs of the CSRC, the top securities regulator.

The commission is now ramping up efforts to advance registration-based reform on the ChiNext, Shen­zhen's innovative enterprise-heavy board, Cheng said on Saturday.

This followed the debut of the sci-tech innovation board, or the STAR Market, in Shanghai this July, about nine months after President Xi Jinping announced that China would launch the board as the test for the registration-based system.

Hong Rong, founder of Shanghai-based investor platform Hongda Education, said it is critical to ensure a phase-in of the registration reform to avoid any bumps in raising funds that could put heavy pressure on market liquidity.

Another major breakthrough in revised law is the stringent crackdown on illegal market behavior, stipulating not only the confiscation of illegal proceeds but harsher administrative punishments.

For instance, if a company engages in fraudulent public offerings and has yet to issue the securities, it will face fines of between 2 million and 20 million yuan ($286,000 to $2.86 million). This contrasts with the current fines of between 300,000 and 600,000 yuan.

A listed firm that discloses false, misleading or incomplete information will face fines of between 1 million and 10 million yuan, while an individual will be fined up to 10 times the illicit gains for insider trading or market manipulation, according to the revised law.

Liu Junhai, director of the Business Law Center at Renmin University of China, said the higher fines will help address the problem that the cost of illegal behavior can be less than the resulting profits in the capital market. Increasing the fines also will reduce unfair and dishonest market behavior and considerably boost investor confidence, Liu said.

To better protect the legitimate rights of investors, the new law also makes a distinction between ordinary investors and professional ones in order to set up appropriate investor protection arrangements.