Upgrading the Sponsorship System: The CSRC Makes Moves to Enhance Market Quality
March 31, 2004 | BY
clpstaff &clp articlesThe creation of healthy capital markets in China has come under renewed attention with recent moves by the government to promote sound corporate practices by both issuing companies and sponsors.
By Mao Baigen & Roland Sun Pu Dong Law Office
Since the end of 2003, the China Securities Regulatory Commission (the CSRC) has been preparing a new reform programme for China's existing stock issue and listing system. The specific reforms of the stock sponsorship system are echoed in the State Council's Promotion of the Reform, Opening and Stable Development of the Capital Markets Several Opinions, which were issued at the beginning of 2004. As in prior reform plans, this year's efforts are designed to improve the corporate practices of the stock issuers and reduce illegal and fraudulent activities that frequently arise in China's securities market. In addition, now the CSRC's supervisory efforts are focused on sponsors as well as stock issuers. This is reflected in the Sponsorship System for Offering and Listing of Securities Tentative Procedures (the Procedures) and its implementing circular (the Implementing Circular).
Background
Although a sponsorship system for stock issues has been in place for many years, PRC legislation to date hasn't covered securities sponsorship in any detail. The role of a sponsor has only been interpreted in a common business administration sense, and has been limited to rendering the reference documents for its client to the CSRC and stock exchanges and to its obligations as lead underwriter. The consequence of this general interpretation is obvious and undesirable sponsors may freely recommend any company to the CSRC regardless of their competence for stock issue or listing since they are not legally obliged to control the same. We have seen many cases in the past in which sponsors prettified unqualified clients by fair means or foul in order to improve their public image, and in which they have advised or allowed their clients to conduct deceitful activities. The regulatory authorities' efforts to end these practices have focused on the stock issuers. Few problematic sponsors have suffered any substantial penalties, even though they have greatly contributed to the deceitful activities that have in turn caused great losses to stock buyers. The absence of any legislation is the main reason for this situation. In this context the CSRC enacted the Procedures, making the regulation of the sponsors the target of China's most recent securities market reforms.
Contents
The Procedures mainly regulate sponsors in three respects: qualifications; responsibilities; and operation rules.
Qualifications
The Procedures contain provisions that apply to the qualifications of the sponsors and the sponsorship representatives, respectively. A sponsor should be a comprehensive securities company, while a sponsorship agent, who is qualified to operate the sponsorship work, should be an individual with statutory investment bank experience who has passed the relevant competence examination. Additionally, some other requirements are also to be met, such as a track record free of any illegal operations and no material defects in corporate governance.
As the qualification of sponsors is laid down as the statutory prerequisite to engage in the sponsorship business for the securities market, such a qualification system is helpful in standardizing practices in China's securities sector. It can be anticipated that quite a number of small-sized securities companies and personnel engaging in this sector will, owing to their poor track records, be unable to satisfy the new requirements for sponsors or sponsorship representatives. It is clear that the CSRC intends to retain the best and most upright through such a qualifications control system and thereby to elevate the overall level of professionalism in the securities underwriting industry. Moreover, according to Articles 16 and 17 of the Procedures, even the survivors of the new weeding-out process also have to maintain their operations in a prudent manner and be in compliance with the law. If not, they are likely to be removed from the roster of qualified sponsors at any time by the CSRC.
Responsibilities
While the qualifications are the prerequisites for conducting a sponsorship business or being an agent, defining the responsibilities is the core intent of the Procedures. The CSRC is trying to upgrade the stock issue and listing system from a current "approval system" to a "registration system". This means that administrative procedures prior to the stock issue or listing will be streamlined to a considerable extent, while the CSRC will pay more attention to ex post facto supervision of the stock issuers. However, streamlining is not designed to relax the controls on the qualifications of the stock issuers
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