China sets out clear penalties for illegal share sales

China's top securities regulator released draft rules detailing administrative penalties for illegal share disposals by major shareholders on Friday, in a move to better protect investors' rights.

The China Securities Regulatory Commission said the draft implementation rules, open for public consultation till May 17, have detailed the definition and punishment of illicit securities transfers.

Sources familiar with the matter said the rules seek to reduce enforcement discretion and enhance transparency, while reinforcing the crackdown on big shareholders' illegal share disposals that infringe the legitimate rights of ordinary investors.

They said that, upon implementation of the new rules, the overall intensity of penalties is expected to remain broadly stable while being moderately strengthened.

The rules classify different types of illegal shareholding reductions and set out tiered penalty standards.

For the most serious violations, such as transferring original shares during restricted periods, cases involving more than 5 percent of a listed company's total shares and exceeding 500 million yuan ($73.2 million) in value would face fines ranging from more than 50 percent up to one time the illegal transaction amount, the draft said.

By contrast, such cases involving under 2 percent of total shares or less than 40 million yuan would incur fines of less than 30 percent, the draft said, while other cases fall into a mid-tier category with penalties between 30 percent and 50 percent.

Rather than introducing new restrictions, the draft codifies existing enforcement practices, aligning with the revised Securities Law effective in 2020.

Compared with many mature overseas markets, China's regulatory stance on illegal share disposals is stricter, analysts said, aiming to curb controlling shareholders from exploiting their dominant positions for irregular share sales and to better protect the interests of small and medium-sized investors.