Strengthening Enforcement of Buy-back Operations for Violative Reduction

Xiong Jinao

October 11th, the China Securities Regulatory Commission (CSRC) and its local branches in Beijing, Shanghai, Shenzhen, and Jiangsu simultaneously took action against three investors who violated regulations by reducing their stakes in listed companies. The CSRC implemented administrative measures to require these investors to buy back shares and pay price differences to the listed companies. Their reputations were also recorded in the integrity file.

The three violative investors all first received shares through large-scale transactions, then reduced their stakes within six months; some even did so after only one day of receiving the shares. The 2017 regulations on share reduction and the temporary provisions for managing share reductions by listed company shareholders published in May of this year both provide that shares received through large-scale transactions cannot be reduced within six months following receipt.

The current rules prohibit share reduction, but violative investors still insist on reducing their stakes, as if the regulations do not apply to them. This can be seen as a means of reaping profits at the expense of other investors. The CSRC has the power to take administrative measures against violative investors, including requiring them to buy back shares and pay price differences to listed companies.

The CSRC should issue guidelines for enforcing the buy-back operations and specify the timeframe for completing the buy-backs. This would help prevent violative investors from dragging their feet or using the funds they have reduced for other purposes, ultimately failing to repurchase shares.

To ensure that violative investors can actually buy back shares, the guidelines should also specify that any funds received as a result of share reduction cannot be transferred out of the account before the CSRC issues an order requiring the investor to buy back shares. If there is evidence that a violative investor has already or may have transferred their reduced funds, the CSRC can freeze or seize those funds in accordance with relevant regulations.

To ensure the effectiveness of the buy-back operations, the guidelines should also require violative investors to repurchase shares through centralized bidding transactions during the buy-back period. During this time, violative investors and their related parties, as well as major shareholders and senior executives of listed companies, should not be allowed to reduce their stakes or engage in other share reduction activities.

Implementing buy-back operations promptly will help ensure that funds are returned to the market quickly, maintain the balance between supply and demand for shares, and boost investor confidence. On the other hand, violative investors who fail to comply with regulations may be left with a bad reputation and a reduced ability to engage in share reduction activities.

This series of violative share reduction cases highlights the importance of strengthening enforcement of buy-back operations. If major shareholders or senior executives of listed companies violate regulations, they may face more severe legal consequences than administrative penalties.

In fact, Article 36 of the Securities Law provides that major shareholders and senior executives who transfer shares cannot contravene laws, administrative regulations, and CSRC guidelines regarding share holding periods; Article 186 provides that violators will be subject to correction orders, confiscation of illegal gains, and fines. In my opinion, "correction orders" should also include the requirement for investors to repurchase shares. Major shareholders and senior executives who violate regulations may face more severe legal consequences, including buy-back orders and fines, which would help protect the market's hard-won confidence.

The views expressed in this column are solely those of the author.