Recently, SZSE spokesperson answered questions from reporters on self-regulatory and disciplinary measures taken against SZSE-listed companies in 2018.
1. The newly revised Measures for the Administration of Stock Exchanges which took effect since Jan 1, 2018, specifies that exchanges shall take self-regulatory measures or disciplinary sanctions against the violations of laws and regulations in accordance with the provisions of charters, agreements and business rules to fulfill their self-regulatory management duties. Taking self-regulatory and disciplinary measures is an important means for exchanges to maintain market order, prevent risks, and protect investors' legitimate rights and interests. It is also an important tool for exchanges to build standardized, transparent, open, dynamic and resilient capital markets. Please introduce the overall situation of self-regulatory and disciplinary measures taken by SZSE in 2018.
A: Since 2018, SZSE has actively fulfilled the front-line regulatory responsibility for listed companies. We further strengthened the self-regulation function, severely cracked down on violations of laws and regulations, urged listed companies to develop according to laws and regulations, and ensured that front-line supervision was well-founded, open, transparent, precise and effective.
We consolidated the institutional foundation and adapted to the needs of market development. SZSE revised and issued the Implementation Rules on Self-regulatory Measures and Disciplinary Sanctions on Listed Companies. In this way, we perfected the supervision basis, enriched the supervision "toolbox", subdivided the levels of supervision and execution, optimized the procedures for making regulatory decisions, and continuously improved the level of market governance according to law. Meanwhile, SZSE formulated or revised more than 20 business and information disclosure rules on trading suspension and resumption, share repurchase, equity pledge, as well as high-ratio bonus issue and stock dividend distribution etc. In so doing, we supported the standardized development of listed companies and released the vitality of the capital market.
We strengthened self-regulation and kept the first defending line in the capital market. By promptly issuing letters and paying attention to thorough inquiries, SZSE urged listed companies and related parties to explain the doubts in information disclosure and the hot spots and focus of market attention, and respond to social concerns. A total of 2,495 letters of concern and query were sent out in 2018, a year-on-year increase of 38.84%. Among them, around 800 were letters of concern, much more than those issued in 2017. There were around 1,900 letters of query, a year-on-year increase of more than 20%. Besides, a total of 510 regulatory letters were issued throughout the year, a year-on-year increase of 27.82%.
We seriously punished violations and effectively maintained market order. In SZSE's daily supervision, we timely spotted and seriously punished various violations of law and regulations. In 2018, we issued 146 letters of disciplinary decisions, a year-on-year increase of 52.08%. 85 listed companies and 609 person-times were involved, a year-on-year increase of 80.85% and 38.72% respectively. As for violation categories, there were violations of information disclosure, standard operation, securities trading, and intermediary agencies etc. As for supervision actions, SZSE actively and efficiently dealt with vicious violations such as the illegal share reduction of major shareholders of Shandong Molong, the late and incomplete environmental information disclosure of *ST SWGC, and the fake significantly increased net profit of Hunan Erkang etc. The goal was to strive to improve the information disclosure quality of listed companies, prevent and resolve market risks, effectively improve the effectiveness and deterrence of front-line supervision, and fully protect investors' legitimate rights and interests.
2. For disciplinary actions, what issues did SZSE focus on in 2018?
A: The legal and compliant development of listed companies is the basis for the stable operation of the market. Taking disciplinary actions is an important means of purifying market environment, maintaining market order, cracking down vicious violations and establishing regulatory deterrence. Since 2018, SZSE has promoted development through supervision, focused on the following five types of violations and taken disciplinary measures against them in a timely manner.
First, false financial data and violations concerning periodic reports and performance forecast. Financial statistics and performance forecasts are important information sources and basis for investors to understand the production, operation and financial status of listed companies and to make investment decisions. The authenticity, accuracy and completeness of financial statistics, periodic reports and performance forecasts embody the quality and level of the governance of listed companies and financial accounting as well. That is why SZSE has always focused on such violations. In 2018, SZSE implemented disciplinary procedures on 7 listed companies and relevant persons responsible for financial frauds or accounting errors. For example, SZSE denounced Extra ST JEMC, Extra ST Baite and Er-kang Pharmaceutical for overstated income or profit, and Oriental Network for correction of major accounting errors. The chairman of the board and general manager, and the director and CFO of Extra ST JEMC were publicly considered not qualified to serve as director, supervisor or senior management executive in listed companies during a certain period of time. Meanwhile, SZSE paid high attention to the timeliness of the information disclosure of periodic reports, launched disciplinary procedure on 5 listed companies and relevant persons in charge failing to disclose periodic reports within the legal time limit, and conducted public censure and other disciplinary actions according to laws and regulations. Besides, SZSE issued public notices of criticism or conducted censure and punishment on 32 listed companies for their violations regarding delay and inaccuracy in disclosing their performance forecasts, revised performance announcements and preliminary earnings estimates in the past year.
Second, fund embezzlement and violations in providing guarantee. In 2018, against the market background of capital shortage, some listed companies have seen a rise in fund embezzlement and illegal guarantee requests by cash-strapped controlling shareholders and actual controllers, who embezzled company funds via various complicated means such as fraudulent transactions and third-party transfers. Fund embezzlement and illegal guarantee have a malignant impact on the market, resulting in large liabilities and losses on the part of listed companies, impeding the healthy growth of the companies and damaging the legitimated rights and interest of small and medium investors who finally paid for the violations of majority shareholders. SZSE is resolute to crack down on fund security violations such as fund embezzlement and illegal guarantee. SZSE dealt with every case found, conduct investigations, and did not relent. SZSE has initiated disciplinary actions against 10 cases of fund occupation in listed companies over the last year, which is a defective deterrent to potential violators and has purified the market environment. For instance, SZSE has denounced ST XZPT, China Sun Pharmaceutical Machinery, Xinjiang Haoyuan, and Gosun Holding, and have dealt precisely with 84 relevant persons involved in the cases. Besides, SZSE have imposed disciplinary procedures against 8 violations in provision of guarantee including failures to conduct review procedure for or disclose related-party guarantee, and violations in providing external guarantee.
Third, breach of commitments. Integrity is a basic principal in the capital market. Listed companies and their related parties’ breach of commitments and failures to fulfill commitments not only damage the image of themselves as major market participants, but also the immediate interest of investors. In 2018, SZSE denounced and criticized in a circulated notice 26 parties involved in 13 cases where commitments were breached. SZSE showed no tolerance for interest damaging behaviors such as transaction counterparts’ failure to compensate listed companies for underperformance of restructured assets, or shareholders’ failure to honor commitments to increase shareholding. For example, SZSE has criticized in a circulated notice the concert party of the controlling shareholder and the chairman of the board of Huaxing Chuangye for cancelling plans to increase shares, and denounced the controlling shareholder and the actual controller of Steyr Motors for failing to fulfill compensation commitments for underperformance of restructured assets.
Fourth, abnormal M&A transactions. The economy is largely stable, with increasing pressure of an economic downturn, and some listed companies come under performance pressure. Some listed companies tried to manipulate their accounts via unlawful means, such as creating profits through false transactions to sell assets, or acquiring assets from majority shareholders and giving them a blood transfusion, seriously misleading investors. Violations in information disclosure, dodging review procedures, insufficient review, improper accounting treatments, and insufficient information disclosure pose considerable challenges to the healthy development of listed companies. As regards the above mentioned M&A transactions, SZSE has forged a corporate regulatory chain based on information disclosure, via which, SZSE gets to the bottom of issues, screens and tracks clues of violations, and pushes forward the regulatory work. Besides, SZSE also conducts on-site investigations and innovates in the front-line regulation to crack down on violations. Statistics showed that SZSE has imposed disciplinary procedures on 11 transaction violations in the last year.
Fifth, intermediaries' failure of fulfilling duty and obligations. Intermediaries are the guardian of investors' interests and the gatekeeper of the capital market. They shall strictly perform their duty with their professional knowledge, assist and supervise listed companies to strive to improve their quality. However, in practice, some intermediaries failed to fulfill all of their duty and provided unprincipled services. In 2018, SZSE successively carried out criticism via circulated notice against 8 CPAs from 4 accounting firms to urge intermediaries to perform their duty and obligations. For instance, the CPA responsible for the restructuring of Zhejiang Busen Garments failed to cautiously verify the sales revenue, accounts receivable and bank deposits of the restructured object, thus being criticized via circulated notice. Another CPA responsible for the annual audit of Huaiji Dengyun failed to give sufficient attention to the abnormal situations in the company's periodic reports and issued audit reports with false records, thus being criticized via circulated notice.
3. Please introduce SZSE's specific arrangements or measures for the front-line supervision implementation of information disclosure in 2019.
A: Listed companies fulfill their information disclosure obligations in a timely and fair manner and ensure the truthfulness, accuracy and completeness of information disclosure. This is the premise and cornerstone for maintaining the fairness, openness and justice of the market. In 2019, SZSE will earnestly implement the spirit delivered in General Secretary Xi Jinping's speeches at the Central Economic Work Conference and the 13th Collective Studies of the Political Bureau of the CPC Central Committee. Under the CSRC's leadership, we will uphold the general principle of seeking progress while maintaining stability, effectively strengthen the frontline supervision responsibility, improve the basic systems of frontline supervision, guide listed companies to improve corporate governance, enhance the compliance awareness of listed companies, and improve the quality of listed companies.
First, SZSE will make use of the posterior review of annual reports and strengthen inquiries of possible behaviors of manipulating profits such as performance data inventing by using withdrawn large-value asset depreciation reserves, covering up the purpose of profit tunneling, inventing improper transactions to make sudden profit increase, transferring benefits to related parties, changing accounting policies or accounting estimates etc. Our action is designed to give full play to the warning and corrective functions of supervisory inquiries. Disciplinary actions or corresponding regulatory measures will be taken against related responsible entities according to the law once there are violations of fraudulent performance, profit transfer, and profit manipulation etc.
Second, SZSE will continue to maintain the high-pressure management of malignant behaviors such as the fund occupation and illegal guarantee by major shareholders and de facto controllers of listed companies. We will timely spot and seriously deal with them, and take strict precautions against such violations. Meanwhile, SZSE will pay close attention to the capital chain of major shareholders and listed companies to prevent liquidity crisis.
Third, SZSE will maintain high sensitivity to the behaviors of following hot issues and playing up concepts, severely crack down on insider trading, and use the regulatory toolbox reasonably. Besides, we will make quick response, prompt inquiry, and strengthened joint supervision to form a closed supervision loop with information disclosure supervision, transaction monitoring and on-site inspection.
Fourth, SZSE will strengthen technological supervision, continue to improve the corporate portrait project, and continuously improve the technological and smart level of information disclosure supervision. The goal is to strengthen the ability of clue discovery and information analysis, and effectively improve the effectiveness of front-line supervision.
Fifth, SZSE will further improve the regulatory rules system, improve the basic systems of the market, continuously promote regulatory openness, and strengthen the construction of a transparent exchange. Besides, we will do a good job of promotion and interpretation of rules and systems, clarify the red lines of rules and the bottom lines of risks, and adhere to law-based market governance and supervision. Through continuous and precise supervision, we urge listed companies and major shareholders to tell the truth and show true data, guide listed companies to "understand and follow rules", so as to protect investors' legitimate rights and interests, purify the market ecology, promote standardization with rules and facilitate development with standardization.
