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Year 2021, the first year of the "14th Five-year Plan", presents an opportunity for the capital market to march towards high-quality development. The Shanghai Stock Exchange (SSE) will earnestly implement the principle of "setting up the system with no intervention and zero tolerance" by targeting at the quality improvement of listed companies and the further implementation of the requirements of timeliness and accurate supervision through disciplinary action. In addition, the SSE is committed to protecting the comprehensive and in-depth reform and the sound and steady development of the capital market. To achieve the end, it will exert prompt and effective punishment on all kinds of violations, standardize corporate governance, and maintain the information disclosure order in a bid to purify the market ecology.
"Zero Tolerance": Dealing with violations on information disclosure according to rules
In face of the increasingly complicated violation situation in the capital market, the SSE dares to show its "sword" in time to take disciplinary action against violation of laws and rules.
Minor violations outnumber vicious violations. The disciplinary action fulfilled its regulatory and guiding functions in the first half of 2021. In particular, the proportion of violations receiving disciplinary action dropped to 24.34% from 29.91% in the same period of last year; 18 copies of public denouncement were issued, up by 20% year-on-year; 3 persons were publicly identified as breaking rules, mainly for capital occupation, illegal guarantee, financial fraud and other vicious offences; and 47 notices of criticism were issued, staying flat compared with the same period of last year. "Warnings" were given to minor violations and the number of supervision measures increased, with 80 copies of written warnings (up by 58% year-on-year) and 122 copies of oral warnings (up by 31.18% year-on-year) issued. More targeted distinction of responsibility on the "critical few" is imposed to avoid indiscriminate supervision. The average number of people involved in one case dropped to 2.6 persons from 2.74 persons. In the first half of 2021, 74 listed companies, 44 controlling shareholders or actual controllers, and 241 directors, supervisors and senior managers were punished, up by 37.04%, 29.41% and 32.42% respectively; cases involving 9 persons from 4 intermediaries were handled.
From the view of the case types and in accordance with the principle of emphasizing both corporate governance and information disclosure and the "zero tolerance" requirement, the supervision resources were pooled on vicious violations in information disclosure and compliance that cause strong market complaint, damage the interests of small and medium-sized investors, and disturb the market order. In this way, supervision has been strengthened to purify the market ecology.
"Zero tolerance" for financial fraud and "malignant tumors" in the stock market. In the first half year, the tough stance of "zero tolerance" has been upheld against financial fraud and other vicious violations. Typical cases are: the net profit and net assets in the annual report of *ST Fukong presented directional change in huge amount, and the annual auditor identified it as "severely violating the Accounting Standards for Business Enterprises and issued an adverse opinion report, but the Company did not correct in time according to the rules and regulations; the acquisition target in the major asset restructuring of Kangni Mechanical & Electrical involved financial fraud and the Company suffered a loss of RMB3 billion. The SSE made public denouncements against the above cases, and the persons in charge involved in the *ST Fukong case were identified as not suitable for assuming the office of directors, supervisors and senior managers of a listed company perpetually.
Effective punishment on violations of companies listed on the STAR Market. The STAR Market has operated steadily and in order since its opening two years ago, but a few companies have violated regulations. The SSE has identified the minor violations of the STAR Market-listed companies early and handled them in time through disciplinary action, thus preventing re-occurrence. For example, in the case of Ronbay Technology, the Company disclosed its productive capacity and other core data at an investor conference, which caused its share price to hit the upper limit consecutively. The SSE circulated a notice of criticism against the Company, its chairperson, and its secretary of the board.
Constant supervision on intermediaries to fulfill their responsibilities. Intermediaries are an important component of the capital market ecology. The SSE has investigated the violations on information disclosure caused by lack of due diligence and responsibility, held them accountable, and urged them to fulfill their duty as "gate-keeper". In the financial fraud case of *ST Kangmei, the annual auditor did not fulfill its due diligence or follow the standard audit procedures, making false records in multiple audit reports. The SSE publicly denounced this auditor. In the *ST Xintong case, the annual auditor did not give clear opinions on the major events involved in the corporate performance forecast, which led to the drastic change before and after the forecast, and the SSE issued a notice of criticism against this auditor.
Practising "3 in-time" measures for higher handling efficiency
Discovering, stopping and handling violations in time is the main responsibility of the frontline regulation of information disclosure. To improve the "3 in-time" practice, the SSE has specified accurate measures against different factors that affect timeliness. All this aims to improve the "3 in-time" disciplinary actions for higher efficiency of handling cases and active response to market concern.
Timely handling of major violations for quick restoration of market order. Rapid response has been given to the cases of high market concern on the basis of protecting the rights and interests of the persons concerned. The company E-visible did not release the first quarter statement in time and was the only company in the Shanghai Market that failed to release its annual report in 2021, and the SSE circulated the Public Denouncement Letter to the Company and to its person in charge within 2 weeks. In another case, the restructuring investor of *ST Xinyi broke its sales restriction promise and reduced its shareholding in a "clearance" manner in the lock-up period, which severely damaged investors' confidence in the long-term development of the listed company. Thus, the relevant shareholders were publicly denounced and restricted for trading.
Optimizing handling procedures and adjusting measures for different cases. Further differentiating simple and complicated cases and pooling regulatory resources, the SSE has accelerated the handling procedures for cases with clear facts and severe market impacts that might spread. For example, it issued the Public Denouncement Letter to warn against future violations in the *ST Xinyi case. With regard to the cases involving performance forecast and shareholding reduction of Jinbei Automotive and Sitong, which were of clear facts and standards and the parties concerned did not raise an objection, the SSE has taken flexible handling measures to reduce the time of handling.
Timely show of stance on key cases, promptly responding to market concern. For severe violations of great market concern, such as the illegal performance forecast of *ST Kangmei and the inaccurate disclosure of internal control opinions of ST Longyun, the SSE has immediately started the disciplinary action procedures and shown its stance through its regular official release at the same time of issuing the Letter of Intent. In this way, it has shown its regulatory attitude and lost no time in responding to market concern.
"Targeted regulation" for more effective regulatory enforcement
In face of the complicated economic situation and legal environment, the SSE has strengthened the "targeted regulation and scientific accountability" in the disciplinary action and, according to the principle of "combining punishment with leniency", enriched the regulatory measures and optimized the work mechanism to fully implement the requirement of increasing the cost of violation and enhance the effectiveness of enforcement.
Further implementing the requirements of "targeted regulation and scientific accountability". First, the SSE has urged the parties involved to take remedy. For example, it urged the parties involved to rectify in a specified time in cases related to capital occupation and illegal guarantee according to the principle of "regulation by rules and handling in category"; those that have rectified in the specified time like SINOJIT Technology and Shenhua Holdings were given a lesser punishment, while the others were given more severe punishment according to laws and rules. Second, the SSE has distinguished the primary responsibility to make appropriate punishment. On one hand, it has distinguished the responsibilities of the listed company from that of the person in charge. In the case of Meihua Biotechnology in which its controlling shareholder privately made income guarantee for non-public matters, the controlling shareholder had the primary responsibility and was publicly denounced while the company, which had the minor responsibility for failing to timely investigate and release relevant information, was criticized in a notice. On the other hand, the SSE has distinguished the responsibility among the directors, supervisors and senior managers. In the capital occupying case of VCANBIO, its chief financial officer discovered in self-inspection the illegal occupation of capital by the chairperson and urged the chairperson to return the capital in time, so the SSE issued a notice of criticism to the chairperson and only gave a regulatory warning to the chief financial officer.
Introducing more regulatory measures to enhance the effectiveness of self-regulation. First, the SSE has adjusted the application of "regulatory attention". The SSE gives non-public regulatory attention to companies with standard operation and good integrity if they take rectification measures in time against minor offences, thus reminding them of their conduct in a mild way. Second, it has maintained the order of information disclosure by exercising the regulatory tool of suspending the information disclosure direct channel. For example, Dalian Sun Asia has not made information disclosure according to rules for multiple times since the second half of 2020, delayed the submission of announcements without justification, and failed to cooperate in verifying media reports. In this case, the SSE suspended the information disclosure direct channel for Dalian Sun Asia starting from February 2, in a bid to strengthen the regulation and safeguard the order of information disclosure in the stock market.
In-depth analysis for higher professional calibres in case handling. The SSE's disciplinary sanctions are rooted in practice and form an atmosphere of active thinking and proactive research, target-oriented, focusing on practical difficulties, strengthening summary and analysis, and driving professionalism with research results. Aiming at hot and difficult cases in practice, such as intermediaries' due diligence, share repurchase violation, periodic report non-fidelity, etc., which are more controversial and complicated to handle, based on the regulatory situation, theoretical sources are dug deeply to form a set of systematic logic of self-regulation, which provides professional support for regulatory work. At the same time, it extends from ex post supervision to ex ante services, increases training efforts, and guides market players to standardize their operations and self-correct their governance defects through publicity of typical cases such as the annual top ten cases and public condemnation of major cases, so as to gather consensus and form synergy to build a good market ecology.
To rule the market without law leads to chaos, and to abide by the law without change leads to contradiction. As the frontrunner of capital market construction and development, self-regulation should not only use disciplinary sanctions to correct the root of the problem and maintain the market ecology, but also focus on the primary goal of "improving the quality of listed companies" under the background of registration system reform, respond to the market situation, identify the role and positioning, take "zero tolerance against malicious violations" as the starting point, implement "precise supervision", "guide companies to standardize operation and disclose truthfully", promote the formation of a sound market mechanism and an ecology for listed companies to operate steadily, uphold integrity and innovation, and standardize operation, and help the capital market construction to move towards a new era of high-quality development.
