Protecting small investors

Implementation challenge

"The policy on investor protection will be effective only when it is well implemented," Wang said. The first impetus to implement this policy may come from intermediate agencies, not listed companies, because securities companies are the first participants and beneficiaries in the event of a listing.

The State Council announcement will pose new challenges for the traditional business models of securities companies and other intermediate institutions, Wang commented. For example, it proposes the establishment of a caution money system, which will make securities companies more responsible when deciding to sponsor IPOs.

The statement also requires investment asset managers to fulfill their commitments to cash dividends and to try to create good investment returns. A company failing to fulfill the dividend commitments will not be allowed to obtain financing again. According to Wang, most of China's public investment funds are held by small investors, therefore the statement requires managers of public funds to explore a way to align themselves with the interests of investors. This will guide public fund managers to pay more attention to absolute returns on investment.

These measures impose strict requirements on intermediary agencies, and they will no longer accept IPO offers from unqualified companies. This means huge losses to the intermediary agencies, and it is hard to say whether they can withstand the temptation of interests, Wang said.

In his article in Qiushi magazine in August 2013, Xiao Gang, Chairman of the CSRC, wrote, "There are more than 1,200 regulations and rules for China's capital market, 200 of which are for punishment. But over two thirds of them are never used, whether they are related to criminal, administrative or economic responsibilities." The reasons they aren't used include the lack of timely and specific legislation, improper law enforcement, regional protectionism and an unwillingness to handle issues. For these reasons, many cases are not investigated. "Each year about 110 cases are filed for investigation, but less than 60 of them are adjudicated for administrative punishment. Over 30 cases are sent to court for criminal responsibilities each year, but half of them close without any judgment," Xiao wrote.

People are concerned about this situation and are worried that the State Council decision on protection of small investors will also become nothing but a scrap of paper.

According to Wang, when releasing the statement, the State Council referred it to local governments, ministries and commissions, as well as departments directly under the State Council, demonstrating its confidence and resolution for implementation.

The State Council will strengthen cooperation with stock exchanges, judicial departments and the supervising authorities where listed companies and intermediary agencies are located to severely crack down on violations.

The statement requires the establishment of a rapid response and disposal mechanism for events infringing upon the interests of small investors. Securities watchdog and public security departments should strengthen law enforcement cooperation and intervene before the infringement occurs. "That is to say, the supervising authority should intervene just when any event is likely to infringe upon investors, instead of intervening after investors have claimed for losses," said Wang.