New rules to guide listed firms on the SME (small and medium-sized enterprise) board of the Shenzhen Stock Exchange were issued by the exchange yesterday, aiming to tighten the supervision of listed SMEs to better protect small shareholders.

Small shareholders of listed SMEs are expected to play a more important part in the decision-making process, such as the election of directors and supervisors, according to the rules.

"Small shareholders, owning more than 1 percent of the shares of the whole stake, have the right to nominate candidates for directors and supervisors," said the statement.

Furthermore, listed firms on the board should provide Internet access for small shareholders so they can vote on the Internet. This is aimed at giving small shareholders a more convenient way of taking part in the decision-making process.

The rules also set out guidelines for independent directors of listed SMEs; at least half of the directors on the board of a listed firm should be independent (they can not own any shares in the firm and are not allowed to be managers).

The rules advise that a specific fund should be established to protect independent directors. Meanwhile, investors owning shares of more than 1 percent of the whole stake can make proposals to question or dismiss independent directors.

The new rules came out following the country's completion of non-tradable State share reforms of all listed firms on the Shenzhen SME board.

Fifty companies on Shenzhen's SME board finalized the non-tradable State share reform in November.

"As of now, all shares of the listed SMEs are tradable; we must establish new rules to supervise listed firms in line with the new company law and the new securities law," said a source from the Shenzhen Stock Exchange.

He said the rules aim to improve the quality of listed firms on the board and protect public investors, especially small ones.

Listed firms on the Shenzhen board is also required to hold competitive elections when choosing directors and supervisors for the board and to apply 'cumulative voting'.

That allows shareholders to multiply the number of shares they own by the number of directorships being voted for.

The votes may be cast in any manner that the holder chooses all for one director or any combination thereof.

"A listed firm must establish a specific bank account for public investors so they can see how money raised from the public is used," the statement said.

The rules also state that a listed firm must acquire permission from at least two thirds of its independent directors when acting as a guarantor.

To protect investors in listed SMEs, the Shenzhen Stock Exchange will establish a database to collect and disclose information about listed firms, such as those firms' related parties and their investment activities.

The exchange will also build a website to provide a legal consulting service for public investors on law issues.

China first launched reforms for listed firms on the Shenzhen SMEs board in June 2005.

(China Daily January 13, 2006)