Member Article

At the 18th Session of the Standing Committee of the 10th National People’s Congress held on 27 October 2005 amendments to the Securities Law of the of the People’s Republic of China were adopted. The amendments, which were promulgated by President Hu Jintao on 27 October 2005 and enter into effect on 1 January 2006, represent a significant reform of the Law which was first promulgated in 1999. Public issue The amendments provide for the first time a definition of the public issuance of securities. A public issuance of securities will be deemed to occur in any of the following circumstances: • securities are issued without a designated target; • securities are issued to a designated target consisting of more than 200 persons; and • other issuance of securities as specified in laws and administrative regulations. Advertisements, public enticement or other public methods may not be used for non-public issuance of securities. Share issues The amendments specify the documents that are required to be submitted to the China Securities Regulatory Commission (“CSRC”) for the purpose of issuing listed convertible bonds and a qualified sponsor is required. A company is only permitted to issue new shares if it meets the following conditions: it has a sound and well-operating structural organisation, has the capacity for continued profitability, is in good financial condition, does not have a bad record of regulation violation and has not committed a serious illegal act in the past three financial years, and satisfies other conditions specified by the CSRC. The amendments open the door for methods of trading shares other than through spot trading. However, the detailed rules for such alternative methods are not set forth in the Law. Securities companies Under the amendments, securities companies are no longer barred from providing their client financing and securities financing services. If such services are provided, they must comply with relevant regulations and be approved by the CSRC. Protection of interests The amendments include a number of measures that are aimed at protecting the interests of investors. An investor protection fund shall be established by the states which shall be financed, amongst others, with contributions collected from the securities companies. The operation and use of the fund is not clearly specified in the Law. The amendments further specify that funds derived from the settlement of transactions of investors must be deposited in a commercial bank. The amendments bar securities companies from entering these investor funds or securities as part of their assets.