Class action suits offer powerful tool to defend against violation of rights

The implementation of the revised Securities Law will beef up the confidence of A-share investors and smoothen the shift to a registration-based system, as the law offers small investors a powerful tool to defend against violation of their rights, market experts said.

"The revised law is a breakthrough in that it introduced class action suits into China's securities market," said He Haifeng, a member of the China Law Society's research council.

Class action is a legal proceeding in which one or several plaintiffs can file a lawsuit on behalf of a larger group, known as the class, and penalties paid by the defendant are divided among the class members.

"The system of securities class action, especially its arrangement that investors automatically join the class except when they explicitly opt out, will help redress the long-existing weak link in the protection of investors' interests," said He, who is also a counselor to the Beijing-based Tiantong Law Firm.

The revised Securities Law was adopted on Dec 28 and will take effect on Sunday.

It has established China's framework of securities class action as it added an article that representatives of a class of affected investors, or investor protection institutions entrusted by more than 50 investors, are allowed to file a suit against false disclosures and other civil rights violations on behalf of that class of investors.

The institutions can register the list of affected investors with the court, excluding those who explicitly say they do not want to take part in the lawsuit, according to the revised law.

Previously, A-share investors, the majority of whom are small or individual punters, typically found it too costly to file lawsuits, leaving the task of investor protection almost solely to administrative measures, said Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology.

The new law has made suing listed firms much easier and will help activate the function of civil action in investor protection, amplifying the deterrent to securities law violations, Dong said.

Besides introducing class action, the revised law also considerably increases the administrative fines against its violations.

It also has a separate section for investor protection and distinguishes ordinary investors from professional ones. It gives the former more favorable conditions in dispute settlement with securities firms to effectively protect the interests of investors, especially small players.

"Protecting the legitimate rights of investors is one of the most important tasks of the capital market, and serves as the basis for sustainable market development," said Wang Jiyue, an independent investment banking analyst.

Liu Yu-Jane, a professor of finance with Peking University's Guanghua School of Management, said that investor protection has assumed greater significance as the country presses ahead with the registration-based system for new share sales.

The system now features stricter delisting rules, and since some firms are expected to be delisted from the A-share market, this could impair the interests of small shareholders of those companies, Liu said.

The China Securities Regulatory Commission, the top securities regulator, vowed in September to establish the system for securities class action with Chinese characteristics, as part of its efforts to strengthen investor protection.

Analysts said the new law acts as the first step for China to establish such a system, although much work remains to be done.

Though securities class action has long existed in mature capital markets such as the United States, replicating US rules in China could lead to abuse of class action, given the differences between the legal systems of the two economies, said He from the China Law Society.

Considering features of China's justice environment, He expected the country's system of securities class action to retain the arrangement that investors could only bring lawsuits after the defendants are fined by the regulator or found guilty by the court.

He added that detailed arrangements such as who will pay the cost of class action lawsuits and related modifications in the Criminal Law may soon be rolled out to enable the practical uses of securities class action.

The China Securities Investor Services Center, the country's major investor protection institution, said it will bring public-interest securities class action lawsuits at a proper time.

The center said it also plans to promote the establishment of a special fund that aims to compensate investors when defendants in class action lawsuits could not fully pay the penalties.

Apart from improving legal and institutional arrangements, Liu said it is also important to step up efforts to educate individual investors and sharpen their investment abilities, better shielding them from potential new risks under the registration-based system.