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In 2018, the regulatory system of the Shanghai Stock Exchange (SSE) continued to give equal priority to regulation and service, and vigorously supported the listed companies in improving and strengthening themselves through the capital market. In addition, the SSE stayed strict in regulating the violations, and seriously dealt with all kinds of violations that harmed the interests of the listed companies and the investors, so as to effectively maintain the open, fair and just order in the market.
Judging from the handling results, in 2018 the number of the cases increased, and the punishment was intensified. The numbers of the disciplinary sanctions and regulatory concern letters issued throughout the year were 78 and 80 respectively, up by 11.43% and 21.21% respectively, with 89 listed companies, 462 directors, supervisors and executives and 8 staff members of intermediaries involved. In particular, the punishment for major vicious violations was stepped up, and the frequencies of implementing public condemnation and public identification were significantly increased. In the year, a total of 32 public censures were issued, and 22 people were publicly identified as unsuitable for the posts of director, supervisor or executive at listed companies. Specifically, five persons liable with extremely serious violations were publicly identified as unsuitable for life for the posts of director, supervisor or executive in listed companies.
The regulatory effects show that the SSE stepped up the post-event accountability, seriously investigated and dealt with vicious violations, and provided a strong guarantee for maintaining the market order, preventing financial risks and protecting the legitimate rights and interests of the investors. Specifically, in 2018, the violations were dealt with mainly in six areas.
The first kind of violation was that the controlling shareholder used the dominant position to encroach on the interests of the listed company. In 2018, the economic situations at home and abroad were complicated, and the controlling shareholders of some companies met with liquidity difficulties. Therefore, the cases of encroaching on the funds of the listed companies and requiring the illegal guarantees by the companies were increasing. In this regard, the SSE stepped up its regulation and handled nearly 10 such cases throughout the year. The cases of *ST Tyan (Shandong Tyan Home Co., Ltd.), *ST Protruly (Jiangsu Protruly Vision Technology Group Co., Ltd.) and *ST Gong Da High-Tech (Harbin Gong Da High-Tech Enterprise Development Co., Ltd.) were typical. The controlling shareholders or actual controllers of the three companies used their controlling positions to illegally occupy the company's huge funds or carry out illegal large-sum guarantees with the internal management of the companies seriously out of order, resulting in serious circumstances. The cases involved a wide range of responsibilities, and all the directors, supervisors and executives in the term of office were held accountable. Specifically, it was publicly judged that the actual controllers or the chairpersons of the three companies, 3 individuals in total, are not suitable for life for the posts of director, supervisor or executive in any listed company, and other 9 main persons liable are not suitable for the posts of director, supervisor or executive in any listed company for 10 years.
The second kind of violations included financial fraud, delayed disclosure of regular reports, etc. Financial information, a direct reflection of the operating results of the listed companies, is the main basis for investors to make investment decisions. As a major violation in information disclosure, financial fraud has always been the focus of the frontline regulation. In 2018, the SSE continued to pay close attention to such violations and handled nearly 6 related cases. As *ST Shanghai Potevio (Shanghai Potevio Co., Ltd.) fabricated a fictitious business with no substantive transaction content, and Delisted Kunming Machine Tool (Shenji Group Kunming Machine Tool Company Limited) confirmed the cross-term revenues and made fake record of contract, disciplinary sanctions were imposed on the companies and the related persons liable. Last year, four companies failed to disclose annual reports on time, and they were also publicly condemned according to the rules. In this regard, the SSE also promptly sought accountability for violations in performance forecast, failing to disclose major issues in time, major flaws in internal control and other violations, involving nearly 25 cases.
The third kind of violation was improper transactions that harmed the interests of the company and the investors. In 2018, there were some changes in the market environment, as improper transactions of the listed companies increased, and the main purpose was to help the controlling shareholders to cash out and realize the benefit transfer or surplus management, instead of meeting the actual demands of the companies for production and operation. In this regard, the SSE strengthened the efforts in screening in the daily regulation, attached importance to the effectiveness of regulation, and sought accountability for 8 cases of violations such as significantly unfair valuation in transaction, non-compliance in decision-making procedure, and improper transfer of business opportunity. For example, Lotus Health (Lotus Health Group Company) made the related-party transaction unrelated; Zhongzhu Healthcare (Zhongzhu Healthcare Holding Co., Ltd.) failed to fulfill its decision-making procedures and disclosure obligations, and transferred the business opportunity to its controlling shareholder. The disciplinary action was imposed on these companies and related persons liable.
The fourth kind of violation was that the listed companies' imprudent suspension of trading affected the normal trading order of stocks. In recent years, under the coordinated guidance of the China Securities Regulatory Commission (CSRC), the SSE has continued to improve the daily regulation of the suspension and resumption of trading and the corresponding institutional arrangements. The market participants have reached a consensus on the suspension and resumption of trading, and significant improvements have been seen in the phenomena of frequent, early and long-term suspension of trading among the listed companies. However, some companies still abused the right to suspend trading, which affected the investors' normal trading. In 2018, five companies were given disciplinary sanctions. Specifically, Changchun Sinoenergy (Changchun Sinoenergy Corporation) was not prudent in trading suspension for major assets reorganization, and failed to adequately disclose the risk of terminating the reorganization; Guangzhou Yuetai (Guangzhou Yuetai Group Co., Ltd.) rushed to trading suspension with the restructuring conditions not mature. Both companies and the related persons liable were given disciplinary action or regulatory attention.
The fifth kind of violations involved the listed companies using sensitive information as well as exploiting hot issues and hyping concepts. After the centralized rectification in recent years, the phenomenon of the listed companies using hotspot information to speculate on stock prices have been significantly reduced, but some companies were still keen on the trick. Since 2018, the concepts such as blockchain, short-video media and venture capital companies have been highly concerned by the market. Some listed companies took the opportunity to release relevant information, and the disclosed information was not accurate and objective, causing stock prices to fluctuate sharply. Such violations as the improper release of information and the disruption of the market valuation system still require rapid response and strict regulation. Four such cases have been seriously dealt with. For example, U9 Game (Shanghai U9 Game Co., Ltd.) announced its deployment in the blockchain game business on its official website, with the related information disclosed inaccurate, and was given regulatory attention.
The sixth kind of violation was that the intermediaries failed to be diligent in issuing professional opinions. Securities intermediaries, an important force in the governance of the capital market, should strictly perform the statutory duties of inspection and verification as well as professional control, so as to effectively act as the "gatekeeper" for the capital market. The regular regulation found that a small number of intermediaries provided professional opinions mainly from the perspective of facilitating transactions and satisfying clients, with the diligence inadequate. In this regard, it is necessary to strengthen accountability and urge relevant intermediaries to live up to their responsibilities. In 2018, three intermediaries and eight related persons were held accountable. For example, the asset appraisal agency and appraisers for Hisun Pharmaceutical (Zhejiang Hisun Pharmaceutical Co., Ltd.) had a notice of criticism circulated for mistakenly citing important parameters in evaluation and prediction, inconsistent evaluation assumptions, and failing to implement the adequate and necessary evaluation procedures; the asset appraisal agency and appraisers for *ST Wuchangyu (Hubei Wuchangyu Co., Ltd.) had a notice of criticism circulated for insufficient basis for evaluation and the change to the hypothetical premises for evaluation in the short term.
In investigating and dealing with the violations, the SSE has also paid special attention to the standardization of the regulatory actions and effectively protected the legitimate rights and interests of the regulatory targets. In the procedures, the SSE insists on the separation of examination and review as well as collective decision-making, and fully gives the parties the right to objection and defense; if it is necessary, a hearing will be held to verify the relevant situations. In dealing with specific cases, after years of practice, the SSE has formed a relatively unified system of punishment standards, with summarization and improvement continuously made according to the actual conditions, so as to apply the same standards to similar cases. At the same time, the SSE has adhered to the openness in regulation, and promoted the standardization with openness, as the punishment letters and documents have been published in an all-round manner, and the facts of the violations and the basis for punishment have been fully explained, so as to accept the supervision by the market and establish the regulatory credibility. These efforts have not only disciplined the corresponding violators and but also helped warn the market participants and increase their awareness of compliance, so as to prevent problems before they occur. The main goal is to take the interests of listed companies and investors as a starting point, guide the listed companies in earnestly fulfilling their information disclosure obligations and standardizing their operations, and lay a solid compliance foundation for improving the quality of the listed companies.
