Small investors' interests are high on the agenda in the
revision of China's Securities Law, which will be deliberated by
China's legislature later this year.
But the country's legal system needs change to enable investors
to make full use of the Securities Law, including taking collective
action against listed companies that cheat, said Cheng Siwei, vice
chairman of National People's Congress (NPC)
Standing Committee.
The draft of the revised Securities Law has been completed and
will be submitted to the NPC Standing Committee for deliberation at
its meeting in April, Cheng said in an interview with China
Daily.
Investor confidence in the stock market is at a painfully low
point. The market has been in the doldrums for three years owing to
the persistent bad performance of most listed companies, a slew of
corporate scandals and the government's aborted attempts to correct
the market's structural problems.
At least in theory, the existing Securities Law provides for
investors to sue listed companies for such actions as issuing false
information and insider trading, but the law lacks specific
guidance as to the practical application of these clauses. The
civil procedure and corporate laws provide no help, either.
What this means is that while investors are permitted to sue,
they have almost no way to do it.
In 2003, the Supreme People's Court issued guidelines that said
the local courts could only accept cases concerning false
information, which basically ruled out investors' chances for
taking companies to court for other misbehavior.
The 2003 guidelines did say investors could take collective
action against companies in a procedure similar to the class action
lawsuits of the US. However, the court did not address such
questions as the minimum number of plaintiffs required for such an
action.
No official statistics are maintained on the number of such
cases, but the verdict in one collective action was reached in
December 2004. The Heilongjiang Provincial?Higher People's
Court found for the plaintiffs in a case brought by 546 investors
against the Shanghai-listed Daqing Lianyi Petrochemical Co. Ltd.
The ruling marked the first victory by China's small investors in
their attempts to obtain compensation from a corporate cheat.
Cheng said the stock market's function as a venue for investment
was mistakenly downplayed in its early years, as many viewed it
simply as a place to raise money in the growing economy. This has
led to the negligence of listed companies' quality and returns for
small investors.
The result is poor corporate performance and diminishing
investor confidence.
To save the troubled stock market, enhancing the quality of
listed companies should be the prime task, according to Cheng. The
government must encourage the emergence of some real blue-chip
companies and delist consistently poor performers.
"Now it is still a tough issue. None of the local governments
want their companies to be delisted. They will do all they can to
rescue them," noted Cheng.
He also supports the growth of institutional investors such as
mutual funds, and greater regulation and improved oversight of
securities investment funds.
"The system should ensure that individual investors can
distinguish good ones from bad ones," said Cheng. "So the investors
just wouldn't buy the funds that cannot provide good services."
(China Daily February 28, 2005)