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Law revision an imperative
2004-04-08
China Daily
Few Chinese laws as young as the five-year-old Securities Law are in such an urgent need of revision, nor have they aroused such extensive public attention.
A draft revision of the Securities Law, which was adopted by the Standing Committee of the Ninth National People's Congress (NPC) in December 1998 after five readings that spanned five years, is expected to be tabled to the committee for preliminary review later this month.
Proposals for amending the law were aired as soon as it came into effect on July 1, 1999. During this year's annual NPC session early last month, lawmakers put forward three motions to revise the law. Similar motions were raised during previous annual parliament sessions in recent years.
Since the NPC set up a leading group consisting of legislators, legal experts and industry specialists in July to pioneer the process, a wide range of suggestions from different circles have been submitted.
Although views may differ over the extent of the revision needed, it is generally agreed that the planned amendments should reinforce protection of investors' rights by introducing a sound civil liability system and clear restrictions on capital flow and operation regimes of the securities market.
And in rewriting the law, legislators need to draw on the experiences of countries with advanced legal frameworks to prepare China for further opening up to the international capital market now that it has become a full member of the World Trade Organization.
Zhou Zhengqing, head of the group and deputy director of the NPC Financial and Economic Committee, said the revision should avert risks while facilitating the development of the market. It should help pool capital from society and bring about an optimal allocation of resources, while securing the legitimate rights and interest of investors.
The Securities Law was formulated at a time when a bleak financial storm was engulfing most parts of southeast and eastern Asia. It became a logical choice for legislators to place the prevention of financial risks above concerns for liquidity and efficiency of the market. Hence, the law features strong administrative control of the industry.
During the last five years, the law has played a prominent role in guaranteeing the safety of the country's nascent securities market. The industry's chief watchdog, the China Securities Regulatory Commission (CSRC), has made relentless efforts to foster a sustainable development of the sector in the light of the law.
However, the rigid control the law imposes on the industry and its neglect of investors' private rights have increasingly restrained the further development of the industry.
Civil liability
Legislators of the law tried to establish an administrative-centred supervision system to guard against all potential irregularities, hoping to achieve fairness in the market by enforcing administrative penalties and criminal punishments on wrong-doers. In contrast, they shied away from insuring civil damages for investors who incurred losses due to fraud.
All the 36 articles on legal liabilities in Chapter 11 of the law spell out explicit administrative penalties for illegal practices, whereas 18 clauses - or half of them - mete out criminal punishment. Only three articles, in sharp contrast, touch on civil remedies for victims.
As for major securities fraud, only Article 63 stipulates compensation for investors who are cheated by fraudulent information disclosure on the part of issuers and underwriters of securities. There are no provisions on civil liabilities whatsoever on insider trading and market manipulation - two serious offences punishable by as many as 10 years in prison, according to China's Criminal Law.
In reality, almost all of the offenders exposed were disciplined and fined by the CSRC. A few of them were given criminal penalties. None of them, however, was ordered by the court to compensate their victims.
It is true that administrative supervision does have a key role to play in ensuring a sound market order, and that the revised Securities Law should delegate more power to market watchdogs to make them formidable fighters against irregularities.
But to become the only effective force to monitor the market, as the existing law seems to imply, the supervisory bodies must have sufficient resources and means, supported by an ever burgeoning budget from tax payers, be vigilant and rational all the time and take care of investors' interests as if they were their own. Apparently, not all these requirements can be met simultaneously.
In contrast, there are 70 million investors registered at the Shanghai and Shenzhen stock exchanges. Once a regime is set up to guarantee prompt compensation to them if cheated, it would motivate them to become "independent prosecutors" in a low-cost "people's war" against potential fraud.
And enforcing civil liabilities on offenders may effectively strip them of the profits they have plundered from investors through illegal means. It may also deter others from breaking the law.
Most importantly, once investors incur losses because of fraud, what they really care about is not whether the offenders are punished but if they will be compensated. Otherwise, their confidence is dampened and they reduce investment in a market they regard as unfair, which is occurring in the country.
If China wants to lure overseas capital into its securities market, it must embrace common legal practices in other countries, among which a sound civil liability system is integral, in order to safeguard foreign investors' rights and interests.
Flexible regime
The revised Securities Law should also remove unnecessary restrictions on the market by introducing a more flexible set of operating schemes and leaving more space for renovations of transaction tools.
Born amid the Asian financial turmoil, the law bars bank capital from entering the securities market and rules that the securities industry should be set up and administered separately to banks, trust firms and insurance agencies.
While such a separation of business was introduced first in the United States after its economic crisis in the early 1930s, and became a common practice in the West to foil risks, it has been gradually replaced by a multiple operation of the sectors since the 1980s. It is designed to promote a more active capital flow.
The United States itself changed the rule in 1993 to allow banks and securities industries to engage in each other's business. China has to conform to this new trend if it wants to absorb overseas capital and nurture its own heavy-weight market players.
The law also prohibits index futures, broker-dealers from financing their clients with cash or securities, State-owned enterprises from engaging in "speculative" transactions, and investors from selling securities they bought that day, all of which are common practices in overseas markets.
Drafted at a time when the country was tightening its grip over the futures trade, the law approves only spot and cash transactions. Index futures, however, are believed to be a most effective tool to help discover prices and hedge against market fluctuations. Both are urgently needed in the country. The amendments, therefore, should legalize futures trade.
Article 76 of the law also forbids State-owned enterprises from speculating on stocks of listed companies. However, the word "speculate" is in itself not a legal term. Without defining the difference between "speculate" and "invest," this stipulation is virtually impracticable.
And the new law should give more space for the financing of broker-dealers, allowing them to extend credit to their clients in trading listed securities, and introduce a scheme for market-making to ensure the liquidity of the market.
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