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Amended Law to Protect Investors

The amended Securities Law is required for establishing a protection fund for stock investors, said a major official involved in drafting the revised law.

The law is currently under the deliberation of Chinese top legislators.

"This is one of the major measures to protect interests of stock investors, mainly small and medium-sized investors," said Xu Jian, a senior official from the Financial and Economic Committee of the National People's Congress (NPC), in an interview with China Daily.

"Some money for the fund will come from securities companies and others are accumulated in a legal way," added Xu, who is the director of the law drafting team.

He said the scale of such a fund is "not very small" but declined to specify the figures.

Another big step taken by the amended law is to guarantee the safety of stock investors' money.

The amended law stipulates that stock market investors' cash must be deposited in commercial bank accounts of investors, rather than in securities companies.

The current practice allows all cash to be kept by securities companies. Some companies have been found of embezzling the money to make up their business losses.

The number of registered securities accounts in China is about 70 million.

"The new law will not allow securities companies to have any chance of embezzling money," said Xu.

"The amended law is devoted to solving problems in five sectors," said Xu.

They are:

the poor quality of listed companies

irregularities of securities companies

the protection of investors' interests

the improvement of system concerning the issuing

trade and registration of stocks as well as supervision of the stock market.

The draft law amendment has 229 articles, among which 29 are newly added and 95 articles are revised. Fourteen articles from the current law had been deleted.

"Many articles in the amended law will be more practicable in fighting against fraudulent activities in the stock market," said Xu.

For example, the amended law stipulates that companies or people involved in such fraudulent activities as insider trading or market rigging should shoulder compensation responsibilities.

"This is very significant because it allows stock investors to file lawsuits in court and claim compensation," said Xu.

The current Securities Law, which was put into force on July 1, 1999, already contains clauses about investors' rights to sue listed companies, but the clauses are not very practicable because of a lack of specific stipulations for such litigation in the law itself and related laws such as Civil Procedure Law and Corporate Law.

"The revised law will include specific articles on how to ascertain legal responsibilities as well as the punishment," said Xu.

He said the law has left room for the expansion of a market structure in the future, such as allowing trading on credit, which allows investors to borrow money or stocks via stock trading.

Such activities are now categorically banned by the current Securities Law, which was drafted in late 1998, when caution towards risk-taking was extremely high due to the Asian financial crisis.

The introduction of trading on credit is crucial to maintaining vitality of trading, according to Xu. Currently, investors earn money only when the indices rise. The result is that when the stock market declines, trading volume shrinks drastically.

"The merit of trading on credit is that when investors have conflicting views on the market's direction, trading volume still can be vibrant," Xu noted.

Xu said the law will give the China Securities Regulatory Commission (CSRC) more power to supervise the market.

When necessary, CSRC officials are allowed to check the stock accounts and bank accounts of companies and individuals and even take further actions to freeze or close these accounts.

"Such powers are very necessary and it allows CSRC to play bigger role in supervising the market," said Xu.

"Of course, their law-enforcement practice is also under strict supervision so as to avoid the abuse of power," he noted.

Drafting of the amended Securities Law is "good news for Chinese stock market in the long-term perspective."

The law will provide a legal framework for the future development of the stock market. The stock market set six-year closing lows this week.

"The major reason for the current bearish market is the problem concerning the irrational share structure of listed companies," said Xu.

The State Council has promised to adopt policies to resolve the irrational share structure of listed firms, which is a move widely regarded as the basic cure to the ailment in China's stock market.

"Such problem is a policy-related issue, and has nothing to do with legislation," said Xu.

The amended law had been submitted to the NPC Standing Committee for the first review this week.

According to China's legislation procedure, a draft law usually should receive two or three reviews. The new Securities Law is expected to be passed before the end of this year.

(China Daily April 29, 2005)

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