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)