A draft amendment to China's Securities Law was adopted on Saturday by the country's top legislature and will come into effect from March 2020.

It was approved at the end of a six-day bimonthly session of the National People's Congress Standing Committee.

The latest revisions to the law include rules on information disclosure, registration-based initial public offering (IPO) system and more severe punishment for market violations, and insider trading. Additionally, a new chapter was added to the law with provisions on information disclosure and investor protection. 

Registration-based IPO

Under the current IPO system, new shares are subject to approval from the China Securities Regulatory Commission (CSRC) before being listed, but the newly revised version will push forward a registration-based IPO system and lower the requirement for issuing shares from "sustained profitability" to "sustainable operation ability," with the conditions for issuing corporate bonds being greatly simplified and the Issuance Examination Commission-based system being canceled.

Under such a system, CSRC will spare the trouble of vetting IPO applicants and slash the waiting period for listing candidates. The system could also pave the way for deeper and wider market-oriented reforms, letting the market play a decisive role in the pricing and pace of IPOs and reduce administrative controls on trading. 

The pilot of the registration-based IPO system has been put into practice and steadily operational on the Shanghai Stock Exchange's sci-tech innovation board better known as the STAR market. Yi Huiman, chairman of the CSRC, said that the registration-based IPO system on the STAR Market is a major breakthrough and will be gradually rolled out across China's capital markets. 

Information disclosure forms the prerequisite and foundation for the registration-based system. Therefore, the amendment to the Securities Law clearly stipulates that the application documents for securities issuance submitted by the issuer should fully disclose the information indispensable for investors to make value judgments and investment decisions, said Cheng Hehong, director of the Department of Legal Affairs of CSRC, at a press conference following adoption of the revised version. Cheng also noted the documents are required to be true, accurate, complete, concise and easy to understand.

Tougher punishment on market violations

The new draft is poised to further toughen punishments for irregular market practices compared with the previous draft as the lawmakers raise the maximum penalties to 20 million yuan. The previous draft submitted for review in April this year already augmented penalties on companies to as much as 10 million yuan as compared to the current cap of 600,000 yuan. 

Intermediaries and professional services firms involving in fraudulent IPOs will face fines between two million to 20 million yuan, compared to 300,000 to 600,000 yuan at the current stage. Information disclosure obligors responsible for false record, misleading statement or major omission will face punishments between one to 10 million yuan.

Although the CSRC has in recent years continued to ramp up efforts on law enforcement, chaos still has strong presence in the capital market, and one of the main reasons is the low cost of violating laws and regulations. Industry insiders believe the new amendment will reduce the number of market violations. 

Professor Liu Junhai from Renmin University of China believes that the new securities law will promote the amendment to criminal law. "The increase in administrative penalties means that criminal liability should also be on the rise. If criminal liability doesn't increase synchronously, offenders still feel that the cost of violating laws is lower than the illegal proceeds, and they will find it too lucrative to ignore," he told China Securities Journal.

This is the fourth revision to the Securities Law, with the previous three readings taking place in April 2015, April 2017 and April 2019, respectively. It is regarded as a milestone in China's capital market reform that will bring profound changes to the market ecology and better escort the reform and development of the capital market.