In 2021, under the unified leadership of the China Securities Regulatory Commission (CSRC), the Shanghai Stock Exchange (SSE) implemented the decisions and arrangements of the CPC Central Committee and the State Council for crackdown on securities violations in accordance with the law. To achieve the end, the SSE adhered to the guidelines of “building the system, non-intervention, and zero tolerance” and followed the work requirements for “standing in awe of the market, the rule of law, expertise and investors, and forging synergy in comprehensive support for reform, development and stability of the capital market”. Besides, the SSE stuck to the people-oriented nature of the capital market, performed the duties of self-regulatory management, strengthened the front-line regulation in an all-round manner, and severely punished securities violations in accordance with laws and regulations. In addition, the SSE attached more importance to improving the promptness, transparency and synergy of the front-line regulation, maintaining an open, fair and just market order, and protecting the legitimate rights and interests of small and medium-sized investors.
In 2021, the SSE took 185 disciplinary actions against various types of violators, an increase of about 36% year-on-year; 126 securities issuers and 656 relevant regulated parties were punished, up by about 15% year-on-year; more than 50 times, an increase of about 20% year-on-year,ofdisciplinary actions such as public condemnation and public identification of unqualified directors, supervisors or senior executives were imposed on those who took main responsibility in typical and serious cases such as financial frauds, occupation of funds, illegal guarantees, malicious debt evasion, and violations in disclosure of regular reports; and regulatory measures such as written warnings were implemented more than 5,300 times for irregular trading activities and general violations of information disclosure, a year-on-year increase of about 60%.
1. Strictly regulating outstanding issues of listed companies
Improving the quality of listed companies, the cornerstone of the capital market, is an inherent requirement in promoting the high-quality development of the capital market, as well as an important part of an exchange’s responsibility for front-line regulation. The SSE implemented the Opinions on Further Improving the Quality of Listed Companies issued by the State Council, followed the requirements of the CSRC for regulatory collaboration characterized by “three points (the CSRC, the local offices of the CSRC and the exchanges) linked on one line”. Meanwhile, the SSE fulfilled the regulatory responsibility for regulating information disclosure of listed companies, urged listed companies and relevant information disclosure obligors to disclose information in a timely and accurate manner, and strictly handled information disclosure violations. All this aims to improve the regulated governance and information disclosure quality of listed companies.
First, the SSE focused on the punishment for financial frauds and other key cases. In the whole year, 4 cases of financial fraud in information disclosure were handled, 4 listed companies involved were publicly condemned, and 54 people were held accountable, of whom 19 were publicly condemned and 1 was identified in public as being unsuitable to take the position of director, supervisor, or senior executive. For example, the SSE publicly condemneda subsidiary of the delisted Aerospace Communications Holdings Group Co., Ltd.and its major violators for having committed financial fraud for years running, with the total inflated net profit amounting to more than RMB3 billion. The then chairman was publicly identified as being unsuitable to take the position for 10 years.In another case, the SSE publicly condemnedthe delistedPengqi Technology Development Co., Ltd.and those with main responsibilities that had conducted inappropriate accounting treatment of the controlled matters for its subsidiaries, resulting in inaccurate financial data in multiple disclosed regular reports. At the same time, the SSE also handled more than 20 cases of inaccurate disclosure of financial information.
Second, the SSE was tough on the problems of capital occupation and illegal guarantees. The SSE implemented the policy of “clearing debts and rescinding guarantees”, and intensified efforts to detect and urge rectification for the cases of capital occupation and illegal guarantee. In 2021, the SSE pushed more than 70 companies to completely or partially solve the problems of capital occupation and illegal guarantees, with an amount of more than RMB57 billion involved. Self-regulatory punishments were imposed in categories against violations, as 34 disciplinary actions were implemented throughout the year, with 33 listed companies and 232 people responsible penalized. The listed companies and relevant people responsible who had serious violations and refused to make rectification were severely held accountable in accordance with laws and regulations. For example, the controlling shareholder of ST Huayi Electric Company Limited occupied a total amount of RMB2.32 billion of the listed company for a long time, of which RMB1.141 billion were not returned yet, and provided RMB1.088 billion of guarantees in violation of rules, with the company having actually assumed the guarantee responsibility of RMB737 million. The SSE publicly condemned the company and those with main responsibilities, with a number of people identified in public as being unsuitable for the position of director, supervisor or senior executive. In another case, the actual controller of *ST Guangdong Mingzhu Group Co., Ltd. occupied a total of RMB4.017 billion of the company, and as of the end of 2020, RMB1.305 billion had not been returned. The SSE publicly condemned the company and a number of people responsible, with the actual controller publicly identified as being unsuitable to take the position of director, supervisor or senior executive for 10 years.
Third, the SSE continuously strengthened the regulation of information disclosure for annual reports, the major carrier of information disclosed by listed companies and the fundamental basis for investors to make value judgments and investment decisions. Over the years, the SSE has given top priority to the annual reports in the regulation of information disclosure, and strictly regulated on the violations of laws and regulations involved in the disclosure of the annual reports. In 2021, the SSE implemented the provisions of the new securities law on the mechanism of directors’ dissent, further tightened the requirements for directors, supervisors and senior executives to perform their duties in the disclosure of annual reports, and seriously dealt with those who fail to be diligent and responsible. For example, *ST Easy Visible Supply Chain Management Co., Ltd. was the only SSE-listed company that failed to disclose its annual report on schedule. The SSE publicly condemned the company as well as its then directors, supervisors and senior executives. In another case, the general manager of Changzhou Langbo Sealing Technologies Co., Ltd., who was absent from the review and failed to sign the written opinion because of drinking, was publicly condemned. In another example, the independent directors of *ST Chunghsin Technology Group Co., Ltd., who were arbitrarily unable to ensure the authenticity of the company’s annual report, had the criticism notice issued by the SSE. At the same time, the SSE attached great importance to the regulation on the disclosure of the performance forecasts closely related to the disclosure of annual reports, and promptly took disciplinary actions or regulatory measures for more than 20 violations for performance forecasts. All this contributes to the resolute prevention of arbitrary and deceitful forecasts.
Fourth, the SSE stepped up the in-process and ex post regulation of mergers and acquisitions and reorganizations.In line with the requirements for “relaxing control and strengthening regulation”, the SSE intensified the in-process and ex post regulation of the reorganizations with “high valuation, goodwill and commitment”, and stepped up the on-site inspection of cash-based reorganizations, with a total of more than 70 inquiry letters issued, withthe voluntary termination of 9 of the plans upon the inquiries. The SSE's special attention to the mergers and acquisitions and reorganizations in the industries such as real estate and education was intended to avoid disorderly expansion of capital, and toughen the supervision of approvals for specific industries such as those with “high energy consumption and high emissions” and the “high-risk integrated circuit manufacturing”. The SSE also simultaneously followed up the process with ex post supervision, and imposed punishments on violations in major asset restructuring such as inaccurate disclosure of predictive information, inadequate risk warnings, and failure to fulfill performance commitments. For example, the SSE publicly condemned ST Zhongchang Big Data Corporation Limited, its main responsible personnel, and its counterparty for having failed to effectively exercise the shareholder rights after the acquisition, resulting in the loss of control of the subsidiary, which seriously affected the disclosure of relevant information. In another case, the SSE circulated a criticism notice toJiangsu Zongyi Co., Ltd., and its counterparty of cash offer for having failed to complete the performance commitment and fulfill its performance compensation obligation to the company according to the agreement.
2. Strictly implementing the new rules for delisting of listed companies
The CPC Central Committee and the State Council attach great importance to the reform of the delisting system for listed companies in a bid to emphasize the necessity to enhance the delisting system, strengthen the survival of the fittest, and improve the quality of listed companies. According to the Implementation Plan for Improving the Delisting Mechanism for Listed Companies reviewed and approved by the Central Committee for Strengthening Overall Reform, the CSRC has coordinated and guided the SSE and the Shenzhen Stock Exchange in improving the delisting system, tightening the responsibilities of the exchanges for implementation of delisting, and simultaneously optimizing the mechanism for investor protection. While assuming its responsibility for the implementation of delisting, the SSE implemented the new rules for delisting, and strengthened communication and coordination with the local offices of the CSRC and local governments. In addition, it paid attention to the protection of investors’ rights and interests during the delisting process. All this aimed to achieve the “smoothness” and “stability” in delisting.
First, the SSE improved the implementation criteria for financial affairs-based delisting. Under the guidance of the CSRC, the SSE formulated the guide to the operating income deduction among the indicators for financial affairs-based delisting, and clarified the scope of the deductions from the operating income for delisting. All this helped make the delisting indicators more operable. In addition, to achieve effective information disclosure, the SSEpublished the regulatory inquiries and replies, disciplinary actions and other delisting-related letters and documents in a timely manner,and actively accepted the supervision of the market by announcing typical cases.
Second, the SSE prioritized “strictness” in implementing the delisting rules. As the new rules for delisting were first implemented in 2021, the SSE resolutely shouldered its responsibilities, stepped up the delisting regulation, strictly enforced the delisting criteria, and promptly eliminated from the market the companies that lacked the ability to continue operating or seriously violated the laws and rules and disrupted the market order,to achieve the goal of “delisting all that should be delisted”. During the year, 14 companies were delisted from the SSE market, with compulsory delisting imposed on 8 of them; and the delisting risk warnings were promptly issued to 42 listed companies that triggered the corresponding delisting indicators after disclosing their annual reports. While continuing to give play to the role of diversified exit channels, the SSE succeeded in realizing the voluntary delisting of *ST Aerospace Communications Holdings Group Co., Ltd., and the delisting of Yingkou Port Liability Co., Ltd. and ST Jiangxi Changjiu Biochemical Industry Co., Ltd. after merger or major assets restructuring.
Third, the SSE severely punished the violations in delisting. The SSE rigorously cracked down on malicious evasion of delisting by means of financial fraud, profit delivery, market manipulation, etc., and sternly and swiftly imposed punishments on the evasion of delisting and the violations of the delisting companies occurring during the listing period. Specifically, as *ST Dalian Sunasia Tourism Holding Co., Ltd. failed to conduct deduction from the operating income in accordance with the rules, disclosed the information of delisting risk warning untruthfully, and refused to cooperate in the supervision, the SSE publicly condemned the company and those with main responsibilities such as the then chairman, general manager and chief financial officer. In another case, the SSE public condemned*ST Beijing Xinwei Technology Group Co., Ltd. and a number of people responsible for having failed to timely disclose the major business changes of overseas projects and the risk of deduction for guaranteed funds, with the actual controller publicly identified as being unsuitable to take the position of director, supervisor or senior executive for 10 years. In another case, when *ST Xinjiang Yilu Wanyuan Industrial Investment Holding Co., Ltd. and *ST Xin Jiang Ready Health Industry Co., Ltd. were found to avoid delisting through financial frauds, the SSE promptly started the disciplinary procedures.
3. Preventing the recurrence of violations on the STAR Market
The SSE adhered to the information disclosure-centered approach in the reform of the registration-based IPO system. In line with the “three principles of respecting the basic purposes of the registration-based IPO system, learning from international best practices and reflecting Chinese characteristics and development stage features” for the registration-based IPO system, the SSE tightened the issuers’ primary responsibility for information disclosure and the intermediaries’ responsibility for verification and checks, and strictly controlled the access. The SSE optimized and adjusted the IPO underwriting rules, and regulated the IPO pricingon the SSE STAR Market. While focusing on the key goal of improving the quality of listed companies, the SSE strengthened the ongoing supervision of the listed companies on the SSE STAR Market to prevent the recurrence of market irregularities.
First, the SSE promptly investigated and dealt with violations in information disclosure in the review process. Adhering to the basic concept of the information disclosure-centered approach for the registration-based IPO system, the SSE was strict in the information disclosure requirements for the review process in accordance with the principle of “assuming responsibility upon application”. The SSE imposed 1 disciplinary punishment on and issued 5 written warnings to the issuers and relevant people responsible. Specifically, as the actual controller of Jiangsu Bioperfectus Technologies Co., Ltd. deliberately concealed the Valuation Adjustment Mechanism (VAM), the actual controller had a criticism notice circulated, and the issuer was given a written warning. In another case, as Shanghai REFIRE Group Limited violated the rules in information disclosure of connected transaction and corporate governance, Sunvou Medical Electronics Co., Ltd. failed to adequately disclose its financial status after the disclosure period, Rayitek Hi-Tech Film Company Ltd., Shenzhen did not fully disclose the investment projects financed by raised funds, and Shanghai Boke Information Technology Co., Ltd. violated the rules in disclosing the related parties and the connected transactions, those companies were given written warnings.
Second, the SSE made rules for the companies on the STAR Market so as to prevent violations as early as possible. Since the opening of the board, the companies on the STAR Market have operated in a regulated manner on the whole. The SSE has remained tough on the violations of some of the STAR-listed companies and the directors, supervisors and senior executives by taking strict and swift actions. With continued crackdown on the misconduct so long as it appears, the SSE lost no time to identify and correct problems while they were nascent and pass the regulatory stance of “zero tolerance” for the purpose of strictly preventing the recurrence of irregularities. Throughout the year, the SSE took 6 disciplinary actions and 10 regulatory measures mainly against the average violations such as inaccurate information disclosure, irregular methods of disclosing the information about directors, supervisors and senior executives, and violations in shareholding lessening by key technical personnel. Specifically, the SSE issued a notice to criticize the chairman and the board secretary of Ningbo Ronbay New Energy Technology Co., Ltd. for having revealed the company’s production capacity and other core data at an investors’ forum, which caused abnormal changes in the company’s stock price. In another case, as Rockontrol Technology Group Co., Ltd. did not adopt compliant accounting treatments for raw materials, and failed to disclose that there were a number of major risks in the business matters in the company, the SSE issued a notice criticizing the company and relevant people responsible.
Third, the SSE seriously dealt with crowding to lower prices in the IPO underwriting. In order to enhance the effectiveness of the market-based pricing mechanism, raise the offline investors’ awareness of compliant quotation, and crack down on the violations such as “crowding to lower prices”, the SSE resolutely included offline investors, underwriting institutions and strategic allotment investors into the scope of regulation. In the whole year, the SSE took regulatory measures in 19 cases, involving 11 offline investors, 3 underwriting institutions and 1 strategic investor. The main violations involved include: the flawed internal control system of offline investors' participation in IPO inquiry, the non-standardized decision-making process, and the insufficient internal research as well as the operational errors of underwriting institutions, inadequate verification of placement by strategic investors, etc. This year, for the first time, written warning was given to strategic investors who participated in the issuer's strategic placement with non-owned funds.
Fourth, the SSE tightened the responsibilities of intermediaries. In order to urge the intermediary agencies to fulfill their responsibilities, on the basis of elaborating their duties and requirements, the SSE intensified the punishments. Throughout the year, the SSE issued 11 written warnings to the intermediary agencies that did not perform their duties properly, involving 3 intermediary agencies and 22 relevant practitioners. Specifically, written warnings were issued to 2 sponsor institutions and 16 sponsor representatives, accounting for more than 70%. The outstanding violations included inadequate verification of the issuer’s affiliate relationship, R&D investment, income recognition and other matters. In some cases, there were also the circumstances such as poor performance of duties and irregular verification and checking in spite of repeated urging. In addition, in response to the irregular professional verification by a small number of accountants and lawyers, the SSE issued written warnings to 1 accounting firm and its signing accountant that had failed to follow the regular external confirmation procedures, and 3 lawyers who had failed to verify the VAM effectively.
4. Coordinating efforts in regulation of information disclosure and risk prevention for the bond market
With the deepening of reform of the registration-based bond issuance system and the ongoing opening up of the market, in accordance with the unified deployment of the CSRC, the SSE has adhered to the general principle of seeking progress while maintaining stability, with full implementation of the new development concept and adherence to the orientation toward the market and the rule of law. In addition, the SSE has improved the mechanisms and rules for bond regulation, with joint efforts to prevent and defuse the risks of bond default, so as to enhance the regulation of violations in the bond market.
First, the SSE continued to improve the mechanisms and rules for bond regulation. The SSE established and improved the system of review rules for the issuance and listing of corporate bonds, revised and released the guidelines for the application of the review rules, and specified regulatory requirements and key issues for review of corporate bonds. The SSE issued the rules for ongoing information disclosure for corporate bonds, clarified various requirements for information disclosure in the duration of the bonds, and focused on strengthening the supervision of information disclosure for the solvency of the bonds. The SSE launched the direct channel for bond information disclosure, tightened the responsibilities of the information disclosure obligors, and improved the market-based restraint of information disclosure. Meanwhile, the SSE also pushed forward the revision of the bond trading rules and the formulation of supporting guidelines for application, and promoted the healthy and orderly bond trading.
Second, the SSE severely cracked down on malicious violations such as debt evasion. In 2021, the SSE investigated and dealt with 3 related cases. Specifically, the SSE publicly condemned the relevant issuers and those responsible as in the case of Huachen Auto Group which had failed to disclose the major matters affecting its solvency as required, and violated the rules to transfer and pledge assets, Ningxia Yuangao Industrial Group Co., Ltd. which had forged the filing documents for mining right mortgage, and Yongcheng Coal Power Holding Group Co., Ltd. for having falsely disclosed huge amounts of monetary funds. Meanwhile, implementing the “dual-punishment in one case”, the SSE issued written warnings to relevant lead underwriters, trustees, law firms and other intermediaries, so as to urge them to perform their duties.
Third, the SSE clarified the stance on the regulation of information disclosure for the annual reports. In response to the lingering problem of bond issuers failing to disclose periodic reports as required, the SSE intensified the punishment. Throughout the year, 46 disciplinary actions were taken against the violations in disclosure of regular reports. Particularly, the SSE collectively imposed the disciplinary sanction of criticism notice for the first time on 28 bond issuers and relevant persons responsible that had failed to disclose their 2020 annual reports on time; and the SSE publicly condemned the bond issuers and relevant people responsible who had a violation on record in disclosing regular reports and still failed to disclose the report on time after the regulatory urging.
Fourth, the SSE expanded the scope of individuals and intermediaries accountable. Implementing the requirements for focusing on the “critical few” and conducting targeted regulation, the SSE strengthened the accountability of individuals. In the whole year, the SSE held 88 people with responsibilities accountable, with those punished expanded from responsible individuals to the major responsible people such as actual controller, chairman, general manager, chief financial officer, and chief for information disclosure affairs. At the same time, the practice of rating agencies was included in the scope of regulation, andthe SSE imposed the disciplinary sanction of temporarily not accepting the submitted documents on institutions including Dagong Global Credit Rating Co., Ltd. for inadequate internal control, irregular operations and other violations.
5. Taking a multi-pronged approach to maintain the normal trading order
It is a basic self-regulatory responsibilityfor a stock exchange to organize and manage securities trading and implement real-time monitoring of securities transactions. The unique investor structure of China’s securities market highlights the people-oriented nature of the capital market. In line with the work arrangements of the CSRC Party Committee, the SSE adhered to the people-oriented stance in trading regulation, continued to make the regulation of abnormal transactions more targeted and effective, and constantly intensified the inspection of trading violations, so as to better serve as the outpost of front-line regulation.
First, the SSE has striven to effectively monitor abnormal transactions and check and report the violation clues. In the whole year, the SSE took self-regulatory measures 4,550 times. Setting up a mechanism for supervising stocks and convertible bonds with significant abnormal fluctuations, the SSE strictly identified and regulated relevant abnormal transactions, with the number of relevant regulatory measures accounting for more than 30% of the total. Intensifying the investigation of clues, the SSE reported 83 clues to various cases, and supported the case-handling and law enforcement institutions in data investigation 382 times. With strict crackdown on pretended market value management, the SSE comprehensively checked the stock transactions involved, reported relevant clues in a timely manner, and fully supported the investigation and handling of cases, thus forming an effective deterrent to violations of laws and regulations.
Second, the SSE made effective efforts to maintain the order of trading of funds and stock options. In order to prevent cross-market illegal transactions and risk transmission, the SSE simultaneously intensified the supervision of violations in fund and stock options trading. In the whole year, the SSE took regulatory measures 277 times against the violations of abnormal options trading, including 237 verbal warnings, 32 written warnings, and 8 requirements for submission of letter of commitment to compliant trading. At the same time, verbal warnings were given to violations such as technical defects in the counter trading system of several options institutions and the failure of cross-border conversion institutions of the Shanghai London Stock Connect to report relevant account information as required.
Third, the SSE improved the coordination mechanism for trading regulation. In the supervision of abnormally volatile stocks, the SSE strengthened the joint efforts in regulation of trading and information disclosure. In response to the securities with significant abnormal fluctuations such as Beijing Hotgen Biotech Co., Ltd., Jinhong Fashion Group Co., Ltd., the convertible bonds of Guangdong Liantai Environmental Protection Co., Ltd. and *ST Guizhou Changzheng Tiancheng Holding Co., Ltd., the SSE urged the companies to issue risk warning announcements in a timely manner and implemented the trading suspension for verification. Giving full play to the role of the members in supporting the regulation, the SSE tightened the responsibility of the members for management of trading irregularities, and urged the members to implement the risk warning requirements for the stocks and bonds with severe abnormal fluctuations. The regulatory measures were taken five times for members' failure to effectively manage key monitored accounts and improper management of clients' conduct.
6. Continuously improving the implementation mechanism for front-line regulation
While stepping up front-line regulation in an all-round manner, the SSE also paid more attention to performing the duties of self-regulation in a strict, fair and regulated manner, with heightenedawareness of responsibility and power as well as procedures, reinforced and transparent supervision, and enhanced standardization and credibility of front-line regulation. The SSE renewed its efforts to strengthen the regulatory capabilities, enrich the means of supervision, and improve the efficiency and professionalism of front-line regulation by implementing categorized regulation and applying reg-tech.
First, the SSE implemented transparent regulation. The SSE dynamically updated and published the SSE’s lists of market supervision and service matters, and announced the supervision basis, procedures and standards one by one; the SSE continued to improve and publish the criteria for implementation of disciplinary actions, and eliminated the “hidden rules”. All this aimed to facilitate the formation of reasonable expectations in the market; and the SSE started the construction of a concise and user-friendly system of rules, and comprehensively sorted out and integrated business rules, with the number of rules greatly reduced by 51%, which facilitates the inquiry by market entities. At the same time, giving full play to the role of the internal remedy mechanism, the SSE organized and held disciplinary hearings for 26 cases and re-examined 4 cases throughout the yearin response to applications. All this contributed to conveying the regulatory philosophy, clarifying the regulatory criteria, and clearing ambiguities.
Second, the SSE implemented efficient regulation. In accordance with the principle of “timely detection, prevention, and investigation and punishment”, the SSE improved the quality and efficiency of front-line regulation. Optimizing the implementation mechanism for disciplinary actions, the SSE shortened the time needed for determining the disciplinary actionby about 30% by taking measures such as countersignature voting, case supervision, and step-by-step handling of complex cases. Improving the mechanism for linking up disciplinary action and administrative punishments, the SSE started the disciplinary action procedures in a timely manner for major vicious violations drawing much attention in the market, and clarified the regulatory position through the SSE Announcements and other platforms.
Third, the SSE implemented categorized regulation. Identifying key companies for supervision and key regulatory matters from multiple perspectives, the SSE focused on the quality and risk of the companies, facilitated the categorized regulation with the evaluation results for disclosure of annual reports, and gave more play to the exemplary and leading role of high-quality listed companies. Relying on various credit platforms and related mechanisms, the SSE made full use of the credit information resources in the listing review for STAR Market and of corporate bonds and the ongoing supervision of listed companies, dynamically tracked risk monitoring, implementeddifferentiated policies, and optimized the allocation of supervision resources.
Fourth, the SSE applied reg-tech. Improving the system of digital development and governance, the SSE set up a professional committee for digitalization, formulated the strategic plan on technology and the technical plan, and implemented its “five-year plan”. Strengthening the technological support for business and regulation, the SSE put the second-phase new supervision project into trial operation, launched the intelligent review-assisting platform for the STAR Market, continued to build the company profiling system, and strived to improve the extension, pertinence and accuracy of the regulation system.
Going forward, under the leadership of the CSRC, the SSE will focus on the general goal of building a regulated, transparent, open, vigorous and resilient capital market. While fully implementing the decisions and deployments of the CPC Central Committee and the State Council on the capital market, the SSE will earnestly fulfill the responsibilities of first-line regulation, improve regulatory capabilities, enhance the handling of securities violations in accordance with laws and regulations, strive to maintain the open, fair and just order of the securities market, and protect the legitimate rights and interests of investors.
