Chinese courts to ‘severely punish’ listing fraud as country reforms IPO regulation

August 19, 2020.

China’s highest court said the judicial system will crack down on securities fraud under the country’s new rules for initial public offerings, marking the latest step in the government’s plans to roll out reforms and open capital markets.

The Supreme People’s Court issued new guidance Tuesday on the role of courts in implementing a registration system for public stock issuance, which the central government said would boost monetary penalties for violations and standardize enforcement criteria.

The top court’s guidance comes days before a group of businesses is scheduled to debut on ChiNext, a -style startup board on the Shenzhen Stock Exchange. The exchange said businesses would become the first to be listed under China’s new registration-based IPO system when they begin trading on Aug. 24.

The high court said it would “severely punish all kinds of corruption and fraud” in accordance with the updated securities law and help establish the infrastructure needed to hear class-action disputes.

China’s new IPO regime was rolled out in March following multiyear deliberations and a testing period in the Shanghai Stock Exchange. While companies gearing up for public offerings used to require approval directly from the national securities regulator, the cumbersome approval process is now being overhauled in favor of a more market-oriented system, according to the Chinese government.

Under the new law, entities like the Shenzhen Stock Exchange are authorized to review and approve IPO applications themselves. Companies found to violate information disclosure requirements or other issuance conditions may face heavy penalties, however. A fraudulent listing could cost a company RMB 20 million ($2.85 million) or the entire proceeds of the IPO, while breaking information disclosure rules could result in a RMB 10 million ($1.43 million) fine.

In July, China launched a new class-action mechanism that it said would combat corporate malfeasance. On Wednesday, the Supreme People’s Court said it was responsible for clarifying “the boundaries of responsibility” of different parties involved in information disclosure. While companies issuing public stock are on the hook for fraud-related penalties, the court said brokers also have a “duty of care” to investors and could be held liable for failing to adequately protect investors’ interests.