Role of the CSRC
The CSRC is the centralised market regulatory body in China and has played a crucial role in improving the quality of listed companies by selecting them on merit via a listing committee. The development of securities markets in China since the commencement of the opening and reform of China inevitably led to the establishment of a centralised market regulatory body. The establishment of the State Council Securities Commission (the “SCSC”) and the China Securities Regulatory Commission (the “CSRC”) in October 1992 marked the formation of this regulatory body. The SCSC is the State authority responsible for exercising centralised market regulation. The CSRC is the SCSC’s executive branch responsible for conducting supervision and regulation of the securities markets in accordance with the law.
In April 1998, pursuant to the State Council Reform Plan, the SCSC and the CSRC were merged to form one ministry rank unit directly under the State Council. Both the power and the functions of the CSRC have been strengthened after the reform. A centralised securities supervisory system was thus established.
The CSRC’s basic functions are:
- To establish a centralised supervisory system for securities and futures markets and to assume direct leadership over securities and futures market supervisory bodies.
- To strengthen the supervision over securities and futures business, stock and futures exchange markets, listed companies, fund management companies investing in the securities, securities and futures investment consulting firms, and other intermediaries involved in the securities and futures business.
- To raise the standard of information disclosure.
- To prevent and handle financial crises.
- To organise the drafting of laws and regulations for securities markets. To study and formulate the principles, policies and rules related to securities markets.
- To formulate development plans and annual plans for securities markets.
- To exercise centralised supervision of securities business.
Its major responsibilities are:
- Studying and formulating policies and development plans regarding securities and futures markets; drafting relevant laws and regulations on securities and futures markets; and working out relevant rules on securities and futures markets;
- Supervising securities and futures markets and exercising vertical power of authority over regional and provincial supervisory institutions of the market;
- Overseeing the issuance, trading, custody and settlement of equity shares, convertible bonds, and securities investment funds; approving the listing of corporate bonds; and supervising the trading activities of listed government and corporate bonds;
- Supervising the listing, trading and settlement of domestic futures contracts; and monitoring domestic institutions engaged in overseas futures businesses in accordance with relevant regulations;
- Supervising the behaviour of listed companies and their shareholders who are liable for relevant information disclosure in securities markets;
- Supervising securities and futures exchanges and their senior management in accordance with relevant regulations, and securities associations in the capacity of the competent authorities;
- Supervising securities and futures companies, securities investment fund managers, securities registration and settlement companies, futures settlement institutions, and securities and futures investment consulting institutions; approving in conjunction with the People’s Bank of China, the qualification of fund custody institutions and supervising their fund custody business; formulating and implementing rules on the qualification of senior management for the above-mentioned institutions; and granting qualification of the people engaged in securities and futures-related business;
- Supervising direct or indirect issuance and listing of shares overseas by domestic enterprises; supervising the establishment of securities institutions overseas by domestic institutions; and supervising the establishment of domestic securities institutions by overseas organizations;
- Supervising information disclosure and proliferation related to securities and futures and being responsible for the statistics and information resources management for securities and futures markets;
- Granting, in conjunction with relevant authorities, the qualification of law firms, accounting firms, asset appraisal firms, and professionals in these firms, engaged in securities and futures intermediary businesses, and supervising their relevant business activities;
- Investigating and penalizing activities violating securities and futures laws and regulations;
- Managing the foreign relationships and international cooperation affairs in the capacity of the competent authorities; and
- Any other duties as commissioned by the State Council.
The CSRC has one chairman, four vice-chairmen, one secretary general, and two deputy secretaries generals. It has 13 functional departments or offices, 3 subordinate centers, and one special committee. It also has 10 regional offices set up in key cities around the country and a missionary office in every province, autonomous region, cities directly under the jurisdiction of the State Council, and cities enjoying the provincial-level status in the state economic plan.
Recent Important Initiatives
Introduction of a Code of Corporate Governance
This is the first developed and enforced code in relation to corporate governance practices for Chinese listed companies. The Code, issued on 7 January 2001, is mandatory for all listed companies and will be incorporated into the listing rules of the PRC’s two stock exchanges. Consistent with the basic principles of the Company Law, the Securities Law and other relevant laws and regulations, as well as the commonly accepted standards in international corporate governance, the Code of Corporate Governance for Listed Companies (the “Code”) is formulated to promote the establishment and improvement of corporate structures and systems by listed companies, to standardise the operation of listed companies and to develop the securities market of the PRC.
The Code is the major measuring standard for evaluating whether a listed company has a good corporate governance structure, and if major problems exist with the corporate governance structure of a listed company, the securities supervision and regulation authorities may instruct the company to make corrections in accordance with the Code.
- The Code stipulates the rights and responsibilities of shareholders, directors, the management, stakeholders, and information disclosure
- It protects shareholders’ rights as the basic goal of corporate governance;
- It seeks to ensure equitable treatment of shareholders, including minority and foreign shareholders;
- It seeks to ensure that related party transactions are fair and transparent, and are agreed by the independent directors
- It calls for shareholder activism and for a role to be played by institutional investors.
System of Independent Directors for Chinese Listed Companies
On 16 August 2001, the CSRC overhauled the insider- controlled board structure traditionally evident in most PRC companies by promulgating the Guidelines for Introducing Independent Directors to the Board of Directors of Listed Companies. These Guidelines require at least one-third of the board of directors of PRC listed companies to be independent directors.
The Guidelines also require that independent directors spend enough time on the companies in which they hold directorships. One director may not hold more than 5 directorship positions concurrently. Further, it is required that independent directors must be “adequately active” (in accordance with the Guidelines) in the affairs of listed companies, their roles must not be merely “ornamental”.
In brief, the Guidelines define “independence” as independent from:
- controlling shareholders;
- management; and/or
- not having major business relationships with the listed company concerned.
The independence of candidates for independent directors must be assessed and approved by the CSRC before they can be voted to be independent directors at shareholders’ meetings. Candidates for independent directors must make a public declaration on their independence and his/her particulars relevant to determining independence must be publicized in newspapers. Independent directors can not work in a listed company for more than 6 years.
Major roles and responsibilities of independent directors include:
- protection of shareholders’ rights and the interests of the company – paying particular attention to minority interests;
- vetting and approval of major related party transactions;
- sitting as chairs of the auditing, remuneration and nomination committees of a listed company – a major constituent of these committees must be made up of independent directors.
Compulsory Training for Directors of Listed Companies and Investors Education
The CSRC currently provides monthly training classes for independent director candidates in Shanghai and Beijing. It has trained over 5,000 independent director candidates during the last 10 months. There are also monthly training courses for directors already on the board of listed companies held by the two stock exchanges, which aim to train all the directors in three years.
The objectives of the compulsory training is to equip directors with a broad knowledge and understanding of the applicable rules and regulations for listed companies, as well as to keep directors informed of the latest changes and developments in the securities industry. The CSRC has organized and held these training courses in the past with the assistance of academic institutions such as the Tsinghua University.
In addition, the CSRC holds various investors education sessions in major cities throughout China and through media, including the internet.
Other corporate governance measures include requirements for quarterly reporting by listed companies and the timely publication of announcements. The Chinese authorities however recognise that although much has been achieved, general standards and a number of recent highly-publicised scandals mean that there is little room for complacency. The CSRC Chairman recently commented that the securities market would not develop without a crack-down on securities fraud.