2020.01.09 XIE, Qing (Natasha)、QIN,Tianyu
After four years of amendments and following the release of the third draft for deliberation of the Securities Law (“Third Draft for Deliberation”) on April 26, 2019, the newly amended Securities Law of the People’s Republic of China (“New Law” or “Securities Law”) was officially promulgated on December 28, 2019. The New Law came into effect on the date of its promulgation and will be implemented on March 1, 2020. This is the second major set of amendments of the Securities Law since the first major revision in 2005. Three main changes have been widely reported and discussed, namely, (i) the reform of the registration-based IPO system, (ii) the imposition of more severe punishments for violations, and (iii) the enhancement of protection for retail investors. Apart from these revisions, this article is intended to briefly introduce the following five aspects that are highlighted for foreign institutional investors, namely, (i) scope of application, (ii) program trading, (iii) prohibition on account lending and borrowing, (iv) short swing profit, and (v) changes in regard to 5% shareholding.
The New Law further expands its scope of application. Article 2 of the New Law stipulates that the Securities Law concerns both (i) shares, corporate bonds, depositary receipts and other securities recognized by the State Council that are issued and traded within the territory of the People's Republic of China (PRC) and (ii) listed treasury bonds and securities investment fund units. Meanwhile, the New Law provides that the State Council will formulate administrative measures on the issuance and trading of asset-backed securities (ABS) and asset management products (AMP) respectively, in accordance with the principles of the Securities Law. Due to the separate regulation of the financial industry, financial products of the same nature may be subject to different regulations and regulated by different regulatory authorities. The proposed expansion to ABS and AMP means that, while separate regulation remains unchanged, the rules and regulations promulgated by different financial regulators are likely to be unified to follow the same or similar criteria. That is to say, ABS and AMP should be regarded as “quasi-securities” and therefore the formulation of their respective rules and regulations shall abide by the principles of the Securities Law focusing on the information disclosure and anti-fraud being the core of investor protection.
The New Law removes the provision in the Third Draft for Deliberation which stipulates that the State Council shall formulate administrative measures on the issuance and trading of securities derivatives in accordance with the principles of the Securities Law. The drafters classify securities derivatives into securities-type (e.g. warrants) and contractual-type (e.g. stock index futures). Between the two, securities-type derivatives can be regarded as “other securities recognized by the State Council” referred to in Article 2 thereof and thus subject to the Securities Law, while the contractual-type derivatives may be subject to the Administrative Regulations on Futures Trading or the Futures Law that is currently being formulated. This statement seems to herald a possible acceleration of the promulgation of the Futures Law.
It is worth noting that a new paragraph has been added to Article 2 of the New Law, which provides that "issuance or trading activities of securities outside the territory of PRC that disrupt the order of the market within the territory of the PRC or damage the legitimate rights and interests of the investors within the territory of the PRC shall be regulated and relevant legal responsibilities shall be pursued in accordance with this Law." This indicates that the Securities Law has certain extraterritorial jurisdiction, which based on our understanding would mean that the issuance or trading behavior occurred in an exchange or over the counter outside of the territory of PRC may be held liable under the Securities Law, if it disrupts the market order of the PRC or damages the legitimate rights and interests of investors of the PRC.
Consistent with the Third Draft for Deliberation, Article 45 of the New Law provides that program trading conducted through automatic generation and delivery of trading orders by the computer programming shall comply with the rules prescribed by the securities regulatory authority of the State Council, and shall be reported to the stock exchanges and shall not impact the security of the trading systems or the normal trading order of the stock exchanges.
Article 190 of the New Law prescribes the legal consequences of violating Article 45. Namely, where the adoption of program trading affects the security of the trading systems of the stock exchanges or disrupts their normal trading order, it shall be ordered to correct and shall, in addition, be issued a fine of no less than RMB 500,000 but no more than RMB 5 million. The person directly in charge and the other persons directly responsible shall be given a warning and shall, in addition, each be issued a fine of no less than RMB 100,000 but no more than RMB 1,000,000.
This article means that the China Securities Regulatory Commission (CSRC) has the right to make specific rules on program trading, and each stock exchange may also formulate detailed rules for the reporting of program trading. Compared with the penalties stipulated in the Third Draft for Deliberation, the New Law slightly increases the fines.
The New Law basically retains the provisions of the previous version in regard to the prohibition on lending and borrowing of securities accounts. No entity or individual shall lend the securities accounts of its own to others or use the securities accounts of others to trade securities in violation of certain provisions. However, compared with the previous version, the New Law imposes a substantially lighter penalty with regard to any violation of the foregoing provision. Namely, each of the lender and the borrower of a securities account shall be ordered to correct or be given a warning, and may also be issued a fine of no more than RMB 500,000.
Article 44 of the New Law stipulates that where a shareholder holding 5% or more of the shares of a company sells its shares of either the company or other securities with the nature of equity within six months after purchasing such shares or securities, or repurchases such shares or securities within six months after selling such shares or securities, the gains therefrom, if any, shall belong to the company. However, this requirement shall not apply to a securities company which comes to hold 5% or more of the shares as a result of absorbing the unsold shares under the terms of an underwriting agreement on a principal basis or other circumstances as prescribed by the securities regulatory authority under the State Council. It is noteworthy that the CSRC would have the authority to grant exemption and therefore we are looking forward to further clarification by the CSRC about any exemptions of short swing profit.
Paragraph 1 of Article 63 provides that when, through securities trading on a stock exchange, the shareholding of an investor, or the joint shareholding of an investor and others in virtue of agreements or other arrangements, reaches 5% of the issued shares with voting rights of a listed company, the investor shall, within three days from the date on which the shareholding reaches 5%, report in writing to the securities regulatory authority of the State Council and the stock exchange, as well as inform the aforesaid listed company of the 5% shareholding and make an announcement thereof. The investor shall not continue to purchase or sell the shares of the listed company during this period of time, unless under the circumstances prescribed by the securities regulatory authority of the State Council. Paragraph 2 of Article 63 states that when the shareholding of an investor, or the joint shareholding of an investor and others in virtue of agreements or other arrangements, has reached 5% of the issued shares with voting rights of a listed company, with every 5% increase or decrease in such shareholding thereafter shall be reported and announced in accordance with the foregoing provision, and the investor shall not further purchase or sell the shares of the listed company in the period from the date on which the shareholding change occurs through three days after the announcement is made, unless under the circumstances prescribed by the securities regulatory authority of the State Council.
The New Law allows exemptions as determined by the CSRC for each of the above two scenarios, and further stipulates that (i) if an investor purchases the shares with voting rights of a listed company in violation of the above Section 1 or 2 of Article 63, such investor is prohibited from exercising its voting rights of the shares which are in excess of the prescribed proportion within 36 months after purchasing such shares; and (ii) when the shareholding of an investor, or the joint shareholding of an investor and others in virtue of agreements or other arrangements, has reached 5% of the issued shares with voting rights of a listed company, every 1% increase or decrease in such shareholding thereafter shall be reported and announced on the day following such increase or decrease.