New amendments to China's criminal law took effect on Monday, allowing heavier penalties for stock market deceptions, as the country pushes through expanding the registration-based initial public offerings (IPOs) system.

IPO filings on the Chinese mainland stock markets are increasingly relying on corporate disclosures rather than government certifications for their approval. This is in line with China's market-oriented reform that makes complete and honest corporate disclosure crucial.

Investment documents, due diligence reports, the structure of securities, and massive lists of compliance regulations – getting all those in order in a limited time is an immense amount of work. But it's the daily routine for Shen Cheng, senior partner at AllBright Law Offices in Shanghai. He has helped more than 10 companies float shares on the stock boards, like Semiconductor Manufacturing International Corporation, which listed on the STAR Market in July.

Shen said that since companies listed on the Nasdaq-style board are required to be involved with innovative industries, they have very complex technical backgrounds often with overseas connections, which could make the full information disclosure very complicated.

"Listing companies have to report their whole process of dismantling or adjusting any overseas structures they're involved with. All the technologies have to be described in easy-to-learn expressions so as to be understandable to a wider public. And the board requires companies and intermediaries to answer all the questions within 90 working days," said Shen.

In February, Shen received a notice from the market regulator asking him to review company structures and stock holdings for all listed firms that he has worked with.

"In the past, related parties would submit a letter of commitment, stating that there were no shareholdings on behalf of other persons. But now a letter of commitment is not enough, we have to provide evidence. One of the most important issues is clarifying the capital flow, regardless of how much stock is involved," said Shen.

Shen also said that with regulators becoming stricter, the whole process from declaration of intent to file an IPO to the final issuance has been extended to more than nine months from the previous six since last quarter.

Stricter regulations on illegal actions in the capital market came as the new amendment to the criminal law goes into effect. The amendments were passed by China's top legislature in December, which define a new sentencing level for cases where the amount involved is especially large or there are other especially serious circumstances.

The most significant changes to the law are in articles 160 and 161, which remove limits on fines for falsification or non-disclosure of important information. Punishment for cases involving especially large amounts or especially serious circumstances is clarified in both articles, and in addition to unlimited fines, penalties can include more than five years in prison.

Senior EY Assurance Associate Tina Tian commented that the new amendments are crucial to the further development of the registration-based market, while the registration-based system still needs to be tested in practice.

"The market should learn how to correctly differentiate between the responsibilities of intermediaries and that of the IPO companies, and evaluate them fairly. The registration-based system is still waiting for more market practice to be examined and optimized, before it can be accepted as an established system," said Tian.

Following the success of the STAR market's adoption of the registration-based IPO system, the board of Shenzhen's NASDAQ-style subsidiary ChiNext launched something similar, with its first batch of registration-based IPOs debuting in the third quarter of 2020. With the wider acceptance of the registration system, Tian said it is all the more important that investors' faith in the markets be supported by strong protection against incomplete information disclosure.

(Cover: A screen displays the Shanghai and Shenzhen stock market data for the day, Shanghai, China, February 1, 2021. /CFP)