China's stock markets are on their way to maturity - marked by
less insider manipulation - with a new regulation controlling stock
sales by senior company executives and majority shareholders.
The new rule is especially significant now that China has
completed its share-merger reform, floating previously non-tradable
shares of State-owned enterprises.
Since the reform, the interests of high-ranking company
executives have been linked more closely with that of their
companies and their stock prices.
There have been signs recently that they have tried various
means to increase the stock prices of their companies, such as by
injecting high-quality assets into the companies.
The new regulations will promote sound operation of the
companies. It will help prevent insider sales from jeopardizing the
interests of individual investors.
Previous laws stipulated that only those who sell more than 5
percent of the overall corporate stock need to disclose the
transaction.
This provided room for insiders to gain from manipulative stock
sales based on their privileged information.
Senior executives and majority shareholders of listed companies
have lately been selling their holdings. In January alone, 19
listed companies saw their high-ranking executives and majority
shareholders sell off part of their holdings, according to
information released by the Shanghai Stock Exchange. The sales
involved many irregularities.
If regulators fail to rein in such irregularities through legal
means, senior managers and majority shareholders will continue to
take advantage of their positions to profit.
The individual investors will suffer, as will the long-term
health of China's stock market.
The new rule more strictly regulates the timing, amount of
shares sold and the reporting of stock sales by senior executives
and majority shareholders of listed companies.
It standardizes their trading requirements.
For example, the regulation stipulates that the stocks sold by
senior company executives and majority shareholders cannot exceed
25 percent of all shares they hold in one year.
By placing a cap on the amount of stock that can be sold by
these shareholders, market regulation is more practicable.
It will also align the interests of those shareholders with that
of the listed companies. The senior executives and majority
shareholders will only maximize their wealth by improving their
companies' performance.
The rule also stipulates that within two days after the stock
sale by these shareholders, the sale must be reported to the listed
companies, which must in turn publicize it on the website of the
stock exchange.
The regulation lays out the timing, method of sale, definition
of what is being sold, and the entities responsible for the
disclosure. This will help standardize information disclosure and
regulate stock sales by senior executives and majority
shareholders.
The press, meanwhile, should follow the implementation of the
rule.
No law is perfect. Although the new rule strengthens regulation
of stock sales by high-ranking executives and majority
shareholders, they may still discover ways to circumvent the
rule.
The power of the media, therefore, should be used to follow the
rule's implementation.
Since the release of corporate information may have a major
impact on stock prices, senior executives and majority shareholders
may wield their influence to postpone the release of information
and take advantage of the time to profit.
The press can play a role in bringing such irregularities to
light.
It can closely watch stock sales by these executives and
shareholders and relate it to corporate stock price movements to
see if there are irregularities.
The media can follow senior executives and shareholders' selling
of large amounts of stock to monitor their investment behavior.
If the press can play an effective role in this respect,
dishonest senior executives and majority shareholders will be
condemned by public opinion as well as the law.
The new regulation shows that the regulators are serious in
protecting the healthy growth of the market by guarding against
market-damaging irregularities.
The authors are researchers with the Research Institute of
Law and Economics, China University of Political Science and
Law
(China Daily April 20, 2007)