Legal protection for stockholders
The amendments to Securities Law were finally tabled at the 15th session of the 10th National People's Congress Standing Committee that ended on Wednesday.
Long-awaited, the draft amendments took quite some time to get their way in front of the legislators.
As early as the end of 2002, the China Securities Regulatory Commission (CSRC) released a draft of the amendments for discussion. A special working group for revising the Securities Law was formally launched in July 2003.
But because of the difficulty of reaching acceptance on the drafts by most interest groups, the primary review by the NPC Standing Committee on the revisions was postponed from December 2003 until now.
As a fundamental law governing the country's financial markets, the Securities Law was promulgated in December 1998 while the preparation of it dated back to 1992.
With a totally different situation in the social and economic terms from today, the law released nearly a decade ago is no longer able to deal with the complicated capital markets and all the interest groups involved.
As Zhou Zhengqing, vice-chairman of the Financial and Economic Committee of the NPC, said, the Securities Law simply cannot meet the demands of the present situation, especially in stock trading and securities supervision.
Nor can a sound mechanism for protecting the interests of investors be established under the law, according to Zhou.
The law does not adequately address some long-existing problems that are plaguing the stock market and listed companies, like poor corporate governance, inadequate information disclosure, and inefficient internal risk control.
Some believe that the amended law may solve these problems .
In the draft available to the public, the amended law places a lot of emphasis on working out necessary mechanisms to protect investors' interests, especially individual investors, among all the issues it is supposed to tackle.
According to reports by the China Securities Journal, a fund is to be set up especially to protect stock investors. The capital within the fund would be collected from the security houses, while the State Council will work out specific measures about its management and payments.
Besides the special fund, which is a commonly accepted practice in many other countries, the revised law also stresses that security houses must enhance their protection of their clients' assets.
Security houses are required to improve their internal controls in this regard to prevent possible conflicts between the interests of different clients.
Also to protect the investors' interests, several clauses were changed about information disclosure. And when listed companies were found cheating in their offerings, sponsors of such listed company would also be held responsible.
These arrangements, as stressed by many officials and experts on different occasions, are meant to set up an integrated network to protect investors' interests, especially those of small investors, to restore investors' confidence in the stock market.
When the background of an ailing stock market and the fact that it dipped to a historical low in six years on Monday are considered, it becomes of special significance as to whether the measures will work as the draft writers wish.
Yi Xianrong, an economist with the Chinese Academy of Social Sciences wrote in the China Economic Times that these arrangements are effective to achieving their goal.
Yi said that the reason for the many problems and difficulties that have obsessed the Chinese stock market in recent years is that there is no fundamental mechanism nurturing the development of the financial markets. And the Securities Law has not served to protect the interests of investors.
After the law is revised to make the above arrangements, it should define the rights and interests of the investors more clearly, which facilitates the efforts of protecting them, according to Yi.
However, Yi also pointed out that another important facet could be improved to protect investors: measures should also be taken to limit the power of the market supervisor.
Despite the numerous crimes that have taken place in listed companies and the stock market, not a single supervisor has taken any responsibility, Yi Xianrong said.
He said that a more important thing to do than stepping up the power of the supervisors is to design proper limits as a "check and balance" to such power.
Ouyang Liangyi, a researcher with the Institute of Economics at Peking University, said the measures disclosed in the revised law are inadequate to protect the interests of non-tradable shareholders.
In the clauses of the Securities Law and the relative regulations, non-tradable shareholders are subject to various limits, Ouyang said in an article in the China Economic Times.
Currently, as much as two-thirds of Chinese stocks are non-tradable shares held by State firms
Admittedly, there were cases in which non-tradable shareholders have violated the interests of small investors, but non-tradable shareholders have their own interests and rights to be protected. The law should grant everyone equal rights instead of protecting certain groups and limiting or even hurting others, Ouyang stressed.
He further pointed out that the poor accomplishments of the listed companies in China are the result of the unequal rights between the holders of tradable and non-tradable shares.
Only when all shareholders enjoy equal rights can the Securities Law deliver solutions to the crux of the problem. Otherwise, any revisions to the law will be no more than small patches of minor significance, Ouyang said.