China to Boost Rights of Small and Medium Investors

October 21, 2013 Posted by China Briefing Reading Time: 2 minutes

Oct. 21 – According to an article published by China’s Securities Regulatory Commission (CSRC) on October 16, a lack of protection of small and medium investors is hindering the development of the domestic capital market, and the country should redesign its regulatory system to protect the interests of such investors.

Current Situation
The CSRC article provides that about 90 million individual investors have opened accounts with the Shanghai and Shenzhen stock exchanges so far, and 60 percent of all share transactions are from investors with investment accounts of less than RMB500,000. This unique characteristic of the capital market has raised new requirements on market operational efficiency and market regulations, and the need to formulate a series of tailored policies and regulation solutions is urgent.

According to the article, the country’s current regulation system lacks the mechanisms to protect the legal interests of small and medium investors and mainly focuses on ensuring the market’s financing function. Besides, the existing capital market structure favors financiers and puts small and medium investors in a vulnerable position. Large stakeholders in companies make decisions which can easily deprive small and medium investors of their interests and benefits through mobilizing large amounts of capital.

Moreover, the unsound investment return mechanism has also damaged the interests of small and medium investors. From 2001 to 2011, cash dividends paid by listed companies only took up 25.3 percent of their profits, while this proportion is usually around 40 percent in developed overseas markets. Besides, the average annualized dividend yield of listed companies has been around 1 percent since 2006. These statistics indicate that the investment return system in China is under-developed and tends to lead to losses for small and medium investors.

In addition, the article said that small and medium investors in the country suffer from inadequate information disclosure and can be easily misled by relevant agencies.

Solutions
In response, the CSRC article emphasizes the need to protect the rights of small and medium investors through complete corporate disclosure, while also articulating that rules and regulations guaranteeing a more timely information disclosure should be formulated.

Moreover, the compensation system for small and medium investors shall be improved. A risk reserve fund will be established to ensure the adequate and timely compensation for small and medium investors. Besides, a delisting risk management system will be launched to reduce potential losses for such investors.

In addition, the article calls for improvements in the decision-making mechanism and shareholders’ voting system, more channels for dispute resolution and approval of preferred shares.

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