Securities Law set to boost capital market

After six years entailing four rounds of review and deliberation, the lawmakers finally approved and adopted the revised Securities Law in December. It was hailed by investors and industry experts as a milestone event in the history of China's capital markets.

Key features of the new law include provisions to expand the registration-based IPOs to the wider marketplace, stricter information disclosure requirements, and tougher penalties for rule violations.

The revised law substantially raises the maximum punishment for violations of information disclosure requirements to 10 million yuan ($1.44 million), from 600,000 yuan in the previous law.

Xue Yi, a professor of finance at the University of International Business and Economics, said that enhanced regulations, the emphasis on market transparency and information disclosure, and the increased penalties will help boost investor confidence and should lift the market's attraction to more institutional investors in the long run.

"In the past, low penalty for committing a crime has undoubtedly encouraged the occurrence of illegal activities and resulted in some serious law violations with a bad social impact," Xue said.

Chinese pharmaceutical firm Kangmei Pharmaceutical engaged in one of the country's largest financial frauds totaling $12.7 billion last year. The company's stock price plunged by more than 75 percent in less than two months, causing huge losses to investors.

Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, said the biggest breakthrough of the revised law is the legalization of the registration-based IPO system.

"The law systemically improves the fundamental system of the Chinese capital market, underscoring the country's determination to deepen capital market reform," Dong said.

The successful experience of the IPO reform at Shanghai's STAR Market has made lawmakers and the regulator confident of expanding the reforms gradually to the entire market, he said.

The law authorized the State Council to implement the new share sale system step by step, which will help maintain market stability, Dong added.

Shenzhen's startup board ChiNext is expected be the next market to adopt the registration-based IPO system this year based on Shanghai's successful experience.

Jack Lee, head of China A-share research at global asset manager Schroders, said in a research note that the registration-based IPO system and increasing the penalties for securities violations will help promote the legalization and marketization of China's capital market.

"In the long run, the better regulated capital market will improve the quality of listed companies and ultimately create better value for investors," he said.

The revised Securities Law will also enhance the regulator's capability to carry out law enforcement measures and to better contain financial risks, which have been listed as one of the key priorities and main objectives of the CSRC this year.

Liu Junhai, director of the Business Law Center at Renmin University of China, said that the revised law will help improve corporate governance and encourage more quality companies to raise funds from the market, which in turn will boost the capital market's role of serving the economy.

The law removed the requirement of continued profitability for companies to be eligible for issuing securities, which made the market more inclusive for companies with various business models and will enable them to focus on improving their competitiveness and creating long-term value for investors, Liu said.

Analysts believe the revision of the law is also a positive development for China's rapidly growing bond market, which is already the world's second-largest.

Deng Bowen, an analyst with China Lianhe Credit Rating Co Ltd, said in a research note that the new law simplified the process for bond issuance and strengthened information disclosure regulations. This will enable the bond market to better serve the economy and accelerate the market's development into becoming more market-oriented and internationalized.