The new regulations on the strictest reduction of A-shares have been implemented, preventing fake divorces, securities lending and other detours to reduce holdings, and clarifying illegal reductions and repurchases

Finance Associated Press

2024-05-24 20:15Published on the official account of Cailianpress, a subsidiary of Shanghai Shanghai Media Group

Finance Associated Press, May 24 (Reporter Lin Jian) On May 24, the China Securities Regulatory Commission officially issued the "Interim Measures for the Management of Shareholders of Listed Companies Reducing Their Shareholdings" and related supporting rules to further standardize the behavior of reducing shareholdings. This is just over a month after the release of the draft for comments. On April 12 this year, the China Securities Regulatory Commission (CSRC) solicited public opinions on the "Administrative Measures for the Reduction of Shareholdings by Shareholders of Listed Companies (Consultation Draft)", which is known as the strictest and most comprehensive shareholding reduction regulations in the history of A-shares.

Up to now, the A-share reduction system has been fully covered. Among them, the China Securities Regulatory Commission (CSRC) simultaneously revised the Rules for the Management of the Company's Shares Held by Directors, Supervisors and Senior Managers of Listed Companies and Their Changes. In addition, at the exchange level, the guidelines for reducing holdings and the guidelines for inquiry and transfer have also been revised simultaneously. The reporter noted that the "Interim Measures for the Administration of Shareholding Reduction by Shareholders of Listed Companies" as a general provision, the "Rules for the Management of the Company's Shares Held by Directors, Supervisors and Senior Managers of Listed Companies and Their Changes" and the unmodified venture capital reverse linkage provisions, as special provisions, together constitute the "1+2" institutional framework related to the reduction of shareholdings.

Specifically, the framework of the Administrative Measures for Shareholding Reduction is basically the same as that of the original Several Provisions on the Reduction of Shareholdings by Shareholders, Directors, Supervisors and Senior Executives of Listed Companies, and retains the core provisions that are more mature in practice, such as the pre-disclosure requirements for the reduction of shareholdings by major shareholders, the restriction on the proportion of shareholding reduction every three months, and the restriction on the proportion of shareholding reduction before the initial public offering. The official version is also basically the same as the framework of the draft for comments, and the Interim Measures for the Administration of Shareholding Reduction by Shareholders of Listed Companies and related supporting rules are worthy of attention as follows:

1. If the listed company discloses that it has no controlling shareholder or actual controller, the largest shareholder is required to comply with the relevant requirements to prevent the circumvention of shareholding reduction restrictions.

2. Calculate the shareholdings of major shareholders through various accounts, including shares held by other people's accounts, shares lent by refinancing, shares sold through agreed repurchase transactions, etc., so as to prevent major shareholders from borrowing identity changes and accelerating the reduction of shareholdings.

3. After the divorce, dissolution and division of shares, all parties continue to jointly abide by the restrictions on reducing shareholdings, so as to prevent "fake divorce" and other detours.

4. Treat the persons acting in concert with the major shareholders as the major shareholders to prevent the shareholders from "breaking up their shareholdings" and circumventing the restrictions on shareholding reduction, and in addition, require the major shareholders to continue to jointly comply with the shareholding reduction restrictions within six months after the termination of the concerted action relationship, so as to prevent the major shareholders from circumventing the restrictions by means of the concerted action relationship.

5. If a major shareholder loses its status as a major shareholder after the transfer by agreement, it shall continue to comply with the restrictions within six months.

6. Return to the essence of judicial compulsory enforcement, pledge default disposal, etc., by analogy with the applicable rules for centralized bidding transactions, block transactions, and agreement transfers, and analogous to the default disposal of pledges for agreed repurchase transactions.

7. For special shareholding reduction methods such as gifts, convertible bonds for shares, subscription or subscription of ETFs, the principle requirements that should comply with the shareholding reduction rules are put forward.

8. It is clarified that major shareholders are not allowed to sell the company's shares through securities lending, so as to ensure the fairness of transactions for small and medium-sized investors.

9. It is expressly forbidden to carry out derivatives trading with the company's shares as the subject matter of the contract, so as to prevent the borrowing of derivatives to achieve a reduction in disguise.

10. It is clarified that if the shares are restricted from being transferred or there are circumstances that cannot be reduced, shareholders shall not lend or sell securities to prevent circumvention of the holding period.

11. Shareholders are required to close existing securities lending contracts before obtaining shares with a restricted transfer period, so as to avoid circumventing restrictions through early layout.

12. Increase the extent of the use of administrative regulatory measures to order corrections, and may order parties to repurchase shares that have been reduced in violation of regulations within a certain period of time, and to pay the price difference to the listed company.

13. Increase the pre-disclosure obligation before major shareholders reduce their holdings through block trading.

14. Clarify that the reduction of holdings in the secondary market by controlling shareholders and actual controllers is linked to the stock price performance and dividends of listed companies, and strengthen restrictions on shareholding reductions to avoid harming the interests of investors.

15. Major shareholders who violate laws and regulations and are under investigation or punished must not reduce their holdings within six months, and must not reduce their holdings before they have paid the fines and forfeitures in full.

16. The controlling shareholder or actual controller shall not reduce the shareholding of the company within six months after being investigated for violating the law or within six months after being punished, or within three months after being publicly reprimanded by the exchange.

17. The company may be forced to delist due to major violations, and the controlling shareholder and actual controller shall not reduce their holdings during the risk warning period and before the relevant matters are determined.

Shareholder shareholding reduction involves a diversity of stakeholders, a high degree of investor attention, and is related to market order and fairness, so it is of great significance to improve the shareholding reduction system. Based on the interviews and the combing of the new regulations, on the whole, the shareholding reduction system reflects and presents four outstanding characteristics:

Aspect 1: Investors are the institutional foundation of the market

Investors are the foundation of the market, and the Interim Measures for the Administration of Shareholding Reduction by Shareholders of Listed Companies and related supporting rules have further consolidated the institutional foundation for investor protection.

Wu Qing, chairman of the China Securities Regulatory Commission, said at the recently held "May 15 National Investor Protection Publicity Day" that since its establishment, the China Securities Regulatory Commission has insisted on taking the protection of the legitimate rights and interests of investors as its fundamental mission and the top priority of its work. The China Securities Regulatory Commission (CSRC) is thoroughly implementing the spirit of the Central Financial Work Conference, fully implementing the new "National Nine Articles", and solidly promoting the implementation of the "1+N" policy measures in the capital market. The core content is to promote strong supervision, risk prevention, and high-quality development in an integrated manner, strengthen the foundation, strictly supervise and strictly manage, and accelerate the creation of a safe, standardized, transparent, open, dynamic and resilient capital market.

After a preliminary interview, the interviewee told reporters that effectively protecting the legitimate rights and interests of the majority of small and medium-sized investors is an important starting point for the formulation of the new regulations on reducing holdings. The formulation of the "Administrative Measures for the Reduction of Shareholdings by Shareholders of Listed Companies" is one of the key contents of the 2024 legislative work plan clarified by the China Securities Regulatory Commission in early April this year, aiming to strengthen the supervision of relevant behaviors in the capital market and effectively maintain a fair, open and just market order. In the longer run, it is to maintain the steady and healthy development of the market and effectively protect the legitimate rights and interests of the majority of small and medium-sized investors.

The boost of investor confidence and the positive impact on the secondary market are also reflected in the above framework. In the early stage of the draft for comments, the reporter learned during the interview that a series of new regulations for the reduction of shareholdings, including clarifying the rules and requirements for the reduction of major shareholders, reduce the uncertainty and panic of the market for the reduction of major shareholders, help stabilize market expectations, and enhance investor confidence. In addition, the new regulations impose strict regulations on the reduction of shareholdings by detours, requiring relevant parties to continue to jointly comply with the shareholding reduction restrictions under specific circumstances, which helps prevent major shareholders from circumventing the shareholding reduction rules through improper means, protects the interests of small and medium-sized investors, and enhances investors' trust in the fairness of the market.

In addition, the Measures for the Administration of Shareholding Reduction clearly require major shareholders to make pre-disclosure before reducing their shareholdings, which improves the transparency of shareholding reduction behavior, so that investors can obtain information in a more timely and accurate manner and make rational investment decisions. Some analysts believe that through a series of clarification of market expectations, the excessive volatility caused by the reduction of market holdings can be reduced, which will help attract long-term capital and promote the healthy development of the market.

Aspect 2: Why is it called the strictest regulation in the history of A-shares?

The Administrative Measures for Shareholding Reduction is the strictest regulation in the history of A-shares, which systematically regulates the reduction of shareholdings by different types of shareholders, shares from different sources, and through different trading and non-trading methods. For the first time, the Administrative Measures for Shareholding Reduction were unveiled in the form of regulations, with the legal status being raised, the authority and binding force being enhanced, and the market expectations becoming clearer.

According to the China Securities Regulatory Commission, the introduction of comprehensive and standardized shareholding reduction management measures is to implement the "Several Opinions of the State Council on Strengthening Supervision and Preventing Risks and Promoting the High-quality Development of the Capital Market" and "Opinions on Strengthening the Supervision of Listed Companies (Trial)" to further standardize the behavior of share reduction.

The reduction of shareholdings by major shareholders has always been the focus of the shareholding reduction system. The Administrative Measures for Shareholding Reduction and related supporting rules have highly strengthened the restrictions on the reduction of shareholdings by major shareholders, mainly from three aspects:

First, the pre-disclosure obligation of major shareholders before reducing their holdings through block transactions is increased, so as to fully protect the right to know of small and medium-sized investors, enhance the fairness of transactions, and reduce information asymmetry. In addition, considering that the equity of some listed companies is relatively concentrated, and the controlling shareholders and actual controllers have a significant impact on the company's operation and development, in order to urge the controlling shareholders and actual controllers to focus on the company's operation, investor returns and investor relations management, it is clarified that the secondary market reduction of controlling shareholders and actual controllers is linked to the stock price performance and dividends of listed companies, and the constraints on shareholding reduction are strengthened to avoid damaging the interests of investors.

In addition, major shareholders are required not to reduce their holdings in the event of major violations, so as to strengthen the restraint on violations of laws and regulations. For example, major shareholders who violate laws and regulations and are under investigation or punished shall not reduce their holdings within six months after they are investigated or punished, and shall not reduce their holdings before the fines and forfeitures are paid in full; For example, if the company is involved in illegal activities and is under investigation or within six months after being punished, or within three months after being publicly reprimanded by the exchange, the controlling shareholder or actual controller shall not reduce its holdings; For another example, if the company may be forced to delist due to material violations, the controlling shareholder and actual controller shall not reduce their holdings during the risk warning period and before the relevant matters are determined.

In addition, at the level of administrative law enforcement, the Administrative Measures for Shareholding Reduction first clarify the corresponding regulatory measures, especially to increase the use of administrative supervision measures to order corrections, which can order the parties to repurchase the shares reduced in violation of regulations within a certain period of time and pay the price difference to the listed company.

Ordering a buyback has many advantages: for example, it can be implemented quickly, which has the effect of correcting violations in a timely manner, and avoids the relatively long waiting time of traditional punishment methods; For example, if the offender can return to a compliant state, the violating entity will not only not benefit, but may pay greater costs and costs; Another example is to enhance the effectiveness of regulatory measures, change the previous situation that the subject of violation is not strong, and need to come up with real money to improve the deterrent effect; Another example is that the price difference can be compensated by small and medium-sized shareholders, the company can also benefit, and investors' sense of gain will be enhanced.

According to the reporter's rough statistics, since the beginning of this year, the China Securities Regulatory Commission and the local securities regulatory bureau have issued nearly 30 fines for illegal reductions, and the reasons for the penalties include excessive shareholding reduction, window period reduction, failure to fulfill the obligation of disclosure and non-fulfillment of disclosure obligations, and violation of restrictive provisions to reduce holdings. In addition, with the increase in supervision by the regulatory authorities on illegal shareholding reduction and the use of repurchase measures, there have been increasing cases of shareholders of listed companies being ordered to repurchase or administrative penalties for illegal shareholding reduction. Under strict supervision, the scale of shareholding reduction by important shareholders of A-share listed companies decreased significantly during the year, which was lower than the scale of shareholding increase in the same period.

The Administrative Measures for Shareholding Reduction refines the circumstances of violations that should be punished, which is conducive to shareholders fully understanding the types of violations, facilitating regulatory law enforcement, and punishing those who refuse to correct in a timely manner or the circumstances are serious. Industry insiders believe that in the future, coupled with the exchange's self-regulatory measures, it is expected that the regulatory and law enforcement of illegal shareholding reduction will form a multi-level punishment system.

Aspect 3: Comprehensively block all kinds of bypass reduction channels

With the improvement of the shareholding reduction system, the possibility of "detouring" shareholding reduction continues to decrease, and in response to new problems such as technical divorce shareholding reduction and refinancing shareholding reduction that appeared in the market last year, the CSRC took timely action to plug the loopholes. On this basis, the "Measures for the Administration of Shareholding Reduction" has systematically sorted out the possible "detours" and made a comprehensive standard.

First, through the identification of shareholders:

First, if the listed company is disclosed as having no controlling shareholder or actual controller, the largest shareholder is required to comply with the relevant requirements to prevent the circumvention of shareholding reduction restrictions. The second is to treat the persons acting in concert with major shareholders as major shareholders, so as to prevent shareholders from "breaking up shareholdings" and circumventing restrictions on shareholding reduction. Third, major shareholders are required to continue to jointly comply with the shareholding reduction restrictions within six months after the termination of the concerted action relationship, so as to prevent major shareholders from circumventing the restrictions by virtue of the concerted action relationship. Fourth, all parties are required to continue to abide by the restrictions on shareholding reduction after divorce, dissolution and division of shares, so as to prevent "fake divorce" and other detours. Fifth, the shareholdings of major shareholders through various accounts are calculated on a consolidated basis, including shares held by other people's accounts, shares lent by refinancing, and shares sold through agreed repurchase transactions, so as to prevent major shareholders from borrowing identity changes and accelerating the reduction of shareholdings.

Second, reorganize the trading method:

First, for the transfer by agreement, the transferee of the agreement is required to lock in for six months, and if the major shareholder loses its status as a major shareholder after the transfer by agreement, it should continue to comply with the restrictions within six months.

The second is to return to the essence of judicial compulsory enforcement, pledge default disposal, etc., by analogy with the applicable rules for centralized bidding transactions, block transactions, and agreement transfers, and to implement the agreed repurchase transactions by analogy with the disposal of pledge defaults.

The third is to put forward the principled requirements that the shareholding reduction rules should be complied with for special shareholding reduction methods such as gifts, convertible bonds for shares, subscription or subscription of ETFs.

Third, see through the essence of the transaction:

First, it is clarified that major shareholders are not allowed to sell the company's shares through securities lending, so as to ensure the fairness of transactions for small and medium-sized investors; Second, it is clear that derivatives trading with the company's shares as the subject matter of the contract shall not be carried out, so as to prevent the borrowing of derivatives to achieve a reduction in disguise; Third, it is clarified that if the shares are restricted within the transfer period or there are circumstances that are not allowed to be reduced, shareholders shall not refinance and lend or sell securities to prevent the circumvention of the holding period limit; Fourth, shareholders are required to close existing securities lending contracts before obtaining shares with a restricted transfer period, so as to avoid circumventing restrictions through early layout.

Aspect 4: The system of rules for reducing holdings is clearer and more hierarchical

The clearer and more hierarchical system of shareholding reduction rules is also a feature of the formulation and release of the CSRC document.

At the level of the China Securities Regulatory Commission, the "Administrative Measures for Shareholding Reduction" are the basic requirements and general provisions, and the "Rules for the Management of the Company's Shares Held by Directors, Supervisors and Senior Managers of Listed Companies and Their Changes", as well as the unrevised regulations on the reverse linkage of venture capital, as special provisions, constitute the "1+2" institutional framework.

At the exchange level, the guidelines for shareholding reduction and the guidelines for inquiry and transfer have also been revised simultaneously, in line with the regulations of the China Securities Regulatory Commission, integrating the previous Q&A content, further refining the relevant requirements, and adding the implementation rules for the reduction of shareholdings by venture capital fund shareholders to form a system of exchange business rules.

(Finance Associated Press reporter Lin Jian)