Upholding the leadership of CSRC, SZSE has actively acted on its duties as a frontline regulator since the beginning of 2019. It has imposed severe punishments for violations of listed companies, urged them to hold the market, the law, the risk and professionalism in awe, and not cross the line (i.e., do not disclose false information, engage in insider trading, manipulate stock prices, or harm the interests of listed companies), and guided listed companies to raise their awareness of compliance of laws and regulations during business operation, thereby making remarkable progress in improving the quality of listed companies.
Since the beginning of 2019, SZSE has made 62 disciplinary decisions against listed companies’ violations in information disclosure and operation, a notable increase of 25 year-on-year. Specifically, 22 involve public condemnation, 52 public criticism, and 8 people committing severe violations were publicly identified as unsuitable for acting as director, supervisor or senior management member in listed companies. In addition to 43 listed companies directly punished by SZSE, 47 shareholders, 202 directors, supervisors, senior management members and 3 annual report auditors who were directly responsible for the violations or who did not fully perform their due responsibilities, were punished accordingly.
SZSE remains committed to three principles in taking disciplinary actions: the first is that it imposes punishment on violations in time in pursuant to the principle of three timeliness; second is that it imposed combined punishment for several offenses and imposes the strictest punishment possible on recidivism. According to this second principle, severe and repeated violations will be given more severe punishment as per regulations; the third is that it attaches more emphasis to the open identification of the cases to duly increase the cost of violations and strengthen deterrence of regulation.
Law-based operation is a pre-condition for sound and stable development of the capital market. Violations of listed companies concentrate on six areas, including capital occupation of controlling shareholders and related parties, illegal guarantee provided by listed companies, and failures of listed companies to fulfill their commitments on performance compensation and share increase. SZSE earnestly fulfills its duties as a frontline regulator, focuses on the important, and takes serious and timely actions to crack down on violations of laws and regulations.
First, imposing strict punishment on capital occupation of controlling shareholders and related parties, and illegal guarantee provided by listed companies. Large shareholders’ capital occupation and illegal guarantee are poison to the capital market, which seriously infringe upon the legitimate rights and interests of listed companies and investors. As the above two problems grow more complicated and imperceptible, SZSE continues to increase its ability to find clues of violations, strengthens cooperation with other regulators, and enhances on-site and off-site regulatory coordination to crack down on violations in a timely manner. In 2019, SZSE has imposed punishment on 9 cases of capital occupation. For examples, the controlling shareholders, actual controllers and their related parties of *ST Tianma occupied nearly CNY3 billion of company’s capital by means of transactions with suspicious commercial substance, accounts receivable, and illegal borrowings; the actual controllers of ST Guanfu occupied nearly CNY2 billion of the company’s capital by issuing commercial acceptance bills and discounted bills, and providing letters of confirmation on transfer of creditor's rights and accounts receivable in the name of listed company. The aforementioned listed companies and major responsible people were all publicly condemned, and some directly responsible people were publicly identified as no longer suitable to serve as director, supervisor or senior management member of listed companies.
Second, imposing strict punishment on failures to fulfill commitments on performance compensation and share increase and other violations. Listed companies and other commitment makers breached or defaulted on their commitments, violating the basic integrity principle of the capital market, and infringing upon the interests of investors. In 2019, SZSE has taken disciplinary actions against 24 parties concerned in 16 breaches of commitments. To be specific, compensating parties involved in restructurings failed to compensate NRB Corporation and Tat Fook Technology as scheduled for the undelivered performance commitments, and shareholders of 11 listed companies including Shanghai Shenkai, ST Yuan Cheng Holding, and Juli Culture failed to perform or fully perform their commitments on share increase.
Third, taking serious actions against violations in major information disclosure. Listed companies should fairly disclose information in time and ensure the information disclosed is authentic, accurate and integrate. Only on this basis can the market grow more fair, impartial and transparent. Upholding the regulatory idea of focusing on information disclosure, SZSE gives priority to violations of requirements in this regard. In 2019, SZSE has imposed punishment on 15 cases involving violations of information disclosure regulations. Upon on-site inspection, SZSE found out that *ST Gosun Holding failed to disclose information on the underlying assets it acquired in an earlier stage in a truthful and accurate manner, completely disclose the pricing and book value of the underlying assets, explain the difference between the assessed and the actual values, and disclose major changes in transactions, thereby imposing public condemnation on the company.
Fourth, severely cracking down on periodic reports-related violations such as financial fraud and accounting errors. Financial data and periodic reports are major sources and basis for investors to get a full command of listed companies’ production, operation and financial status and to make investment decisions. The authenticity, accuracy and integrity of periodic reports and relevant financial data reflect the quality and level of corporate governance and accounting. In 2019, SZSE has punished three listed companies having financial fraud and accounting errors and taken disciplinary actions against the related responsible persons. Among them, Lian Tronics was publicly condemned for making up income and profits; *ST LYPM and EleFirst were punished for correcting accounting errors in an earlier stage; and *ST Changsheng Bio-technology Co., Ltd. and *ST Chengdu Huaze Cobalt & Nickle Co., Ltd. were publicly condemned for not disclosing periodic reports within the statutory time limit.
Fifth, imposing strict punishment on intermediaries for not performing due diligence. As the “gatekeeper” of capital market, intermediaries must duly perform supervision and inspection and issue independent opinions, use their professional skills to see to it that listed companies operate in an orderly and compliant manner, and assist and supervise listed companies to improve themselves. In 2019, SZSE circulated a notice for criticizing three certified public accountants (CPA) of Da Hua Certified Public Accountants during the period of their serving as CPAs of Jiamusi Electric Machine Co., Ltd. from 2013 to 2015, as there were false information in the auditor reports and the audit procedures were not duly and fully performed.
Sixth, getting tough with irregular internal operation and poor responsibility fulfillment of directors, supervisors and senior management members. The procedure-based operation of board of directors, supervisory committees and general meetings of listed companies plays a crucial role in ensuring compliant operation of listed companies and a sound self-discipline mechanism. The directors, supervisors, and senior management shall be truthful to the company shareholders and fully perform their due obligations, so as to promote effective governance and compliant operation of the company. In 2019, in response to their violations, SZSE has imposed disciplinary punishment on listed companies and the directors, supervisors and senior management not fulfilling their duties. For examples, *ST LYPM, Zhongnan Construction, and Zhuhai Zhongfu were punished for not duly performing procedures to review and disclose significant matters, *ST ETI was punished for cancelling general meetings in violation of regulations, and TWH was punished for not answering SZSE’s inquiries within time limit.
Quality listed companies form the foundation for sustaining the development of capital markets. Only with strong foundation can the market grow stronger on a stable path. Keeping in mind CSRC’s arrangements and requirements, SZSE will continue to increase the accuracy, transparency and credibility of disciplinary actions it takes, strengthen the effectiveness and deterrence of frontline supervision, raise the costs of listed companies for violating laws and regulations, improve the working procedure of taking disciplinary actions, and deliver regulatory ideas by initiating special trainings and other forms of activity, in a bid to guide listed companies to improve their governance and help them grow stronger and better.