Doubling Down on Oversight of Listed Companies
China has renewed its commitment to improving the quality of listed companies as the country, with the world’s secondlargest equity market in value, continues to deepen market-oriented financial reforms.
“Ensuring validity, transparency and legality of listed companies through multi-pronged measures is at the core of protecting the legitimate interests of investors,” Yan Qingmin, Vice Chairman of the China Securities Regulatory Commission (CSRC), said at a meeting on June 6.
Yan listed a raft of efforts already in motion, and vowed to pursue a slew of other measures including cracking down on financial statement fraud, delisting unqualified firms and strengthening deterrence against misconducts.
Calling financial statement fraud a “tumor” in the securities market that defies the fundamental concept of information disclosure, Yan reiterated taking a tough stance on uprooting the unlawful practice.
Over the past few months, the Office of Financial Stability and Development Committee under the State Council has reiterated it will impose penalties on companies and individuals indulging in fraudulent practices.
Since 2019, the CSRC has probed 22 listed companies for financial statement fraud, and administrative penalties were imposed on 18 firms investigations.
The new Securities Law, effective since March 1, has raised the cap on cash penalty for fraudulent issuance of bonds and stocks from 600,000 yuan ($85,000) to 20 million yuan ($2.8 million) while doubling that for insider trading, which analysts say will help reduce market breaches and sift out unqualified companies.
Disgraced companies, along with underperforming ones, will face delisting to make room for investment-worthy firms, as the CSRC vowed to perfect the criteria for delisting and streamline the procedure in mid-may.
China has seen a record high of 22 firms delisted in the first five months of this year, among which seven were delisted after their shares traded below face value for 20 consecutive days.
Analysts said the rise of such delisting cases this year indicates that the market is playing an increasingly decisive role in allocating resources.
Many companies that were delisted for trading below face value had devised tricks to secure funds from investors, which ran contrary to the goal of nurturing companies with strong business performance, Yin Zhongli, a research fellow with the Chinese Academy of Social Sciences, said.
In its push for transparency and openness of the capital market and to forestall unlawful practices, China has piloted a registration-based initial public offering (IPO) system that centers on information disclosure at the new Sci-tech Innovation Board that opened for trading in July 2019. The system will soon be applied to Chinext, China’s decade-old Nasdaq-style board of growth enterprises.
The registration-based IPO system for Chinext can improve the quality of listed companies by promoting the survival of the fittest, Ding Lieming, Chairman of Betta Pharmaceuticals Co. Ltd., said, adding that such a move can help stabilize market expectations and stimulate market vitality.
Industry insiders are calling for even harsher punishments for financial crimes to ensure the effectiveness of the registration-based reform in the long run.
While the Securities Law cranked up administrative penalties for certain misconducts, the lack of more fitting punishments under the Criminal Law could hamper the market-oriented reform of stock issuance, Zhu Lieyu, head of Guangdong Guardian Law Firm, said.
Wang Jianjun, President of the Shenzhen Stock Exchange, suggested raising the maximum sentence for fraudulent issuance of stocks and bonds to life imprisonment to effectively prevent such illegal practices.
As the mainstay of China’s real economy, listed companies should be honest and respect laws and regulations, Yan said.
By the end of May, China, the world’s second largest stock market, had 3,868 listed companies with a total market value of 59.61 trillion yuan ($8.42 trillion).
Firms listed on the Shanghai and Shenzhen stock exchanges expect their cash dividends to reach 1.36 trillion yuan ($192 billion) this year, a record high, according to Yan.
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