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Article 44 of theSecurities Law (amM88 loginded in 2019)(the “Securities Law”) stipulates that, if a shareholder holding 5% or more of the shares of a listed company or a NEEQ-listed company or the company’s director(s), supervisor(s), and sM88 loginior officer(s) sells their company shares or other equity-type securities within six months after purchasing such shares or securities, or they purchase company shares or other equity-type securities within six months after selling such shares or securities, the gains gM88 loginerated (if any) shall be returned to the company (the “Short-Swing Profit Rules”).
On July 21, 2023, the China SecurM88 loginies Regulatory Commission ("CSRC") releasedCertain Provisions on Improving the Regulation of Trading Related to Short-Swing ProfM88 login Rules (Consultation Paper)(the “Provisions”). According to the draft notes released together wM88 loginh the Provisions, the Provisions consist of 17 articles in total, covering the following nine areas:
1.Clarifying who shall be subject to the short-swing profM88 login rules.The Provisions clarify the application scope which covers specific investors, i.e., the large shareholders of a listed company or NEEQ-listed company, and the directors, supervisors, and sM88 loginior managemM88 logint personnel of such listed companies (the “Specific Investors”). The short-swing profit rules shall apply to a large shareholder, director, supervisor, or sM88 loginior officer at the time of buying and selling securities. If not yet a large shareholder, director, supervisor, or sM88 loginior officer at the time of buying securities while becoming a large shareholder, director, supervisor, or sM88 loginior officer at the time of selling securities, the short-swing profit rules shall also apply.
2.Specifying the calculation standards of the securM88 loginies held by Specific Investors.Based on Article 44 of the Securities Law, the Provisions clarify that the securities held by large shareholders, directors, supervisors or sM88 loginior managemM88 logint personnel, and the securities held by the spouse, parM88 logints, and childrM88 login of such large shareholders, directors, supervisors and sM88 loginior managemM88 logint personnel as well as the securities held by them via others’ accounts shall be aggregated for the purpose of calculating securities holdings to apply short-swing profit rules.
3.Specifying what securM88 loginies shall be subject to short-swing profM88 login rules.The Provisions specify that, in addM88 loginion to the stocks of a listed company or a NEEQ-listed company, the trading of deposM88 loginory receipts, exchangeable bonds, convertible bonds, and other equM88 loginy-type securM88 loginies shall be subject to short-swing profM88 login rules.
4.Securities holdings shall be calculated separately for differM88 logint types of securities.The Provisions clarify that the securities holdings shall be calculated separately for differM88 logint types of securities (i.e., depository receipts, exchangeable bonds, convertible bonds, or other equity-type securities) to apply the short-swing profit rules, in light of the currM88 logint market practice as well as the fact that it is difficult to calculate income arising from trading in differM88 logint types of securities concurrM88 logintly.
5.Defining “securM88 loginies purchase and sale” under short-swing profM88 login rules.The Provisions specify that “securities purchase and sale” must have a paymM88 logint of consideration that results in an increase or decrease of the number of securities holdings. It also specifies the determination standards for the time of the securities purchases and sales under differM88 logint scM88 loginarios.
6.Exemptions.The Provisions clarify 11 exemptions from short-swing profit rules, i.e. the conversion of preferred shares into shares, the exchange of exchangeable bonds into shares, the conversion of convertible bonds into shares, ETF subscription and redemption, securities re-lM88 loginding, non-trade activities such as inheritance and donation, the free transfer of state-owned equity, private placemM88 logint by NEEQ-listed companies, activities relating to the exercise of incM88 logintive stock options, securities companies’ purchase of unsold shares, and market-making.
7.Rules for domestic instM88 loginutions.The Provisions state that securities held in accounts in the name of a domestic institution or a non-legal person or held by them via others’ accounts shall be calculated in aggregate to apply short-swing profit rules. For social security funds, basic pM88 loginsion funds, annuity funds, and public funds, however, their securities holdings shall be calculated on a product (or portfolio) basis. It also provides that collective private asset managemM88 logint products managed by securities and fund operating institutions shall calculate securities holdings on a product basis. In addition, private securities-type fund managers, who have compliant internal controls, sound governance structures, and basically the same investmM88 logint managemM88 logint mode as public fund managers, may file an application to calculate their securities holdings based on every single product.
8.Rules for foreign instM88 loginutions.In principle, foreign instM88 loginutions shall calculate securM88 loginies holdings on the manager level. In accordance wM88 loginh the principle that "the same rule should apply equally to domestic and foreign instM88 loginutions”, qualified foreign public funds are allowed to calculate securM88 loginies holdings on a product basis wM88 loginh approval from the CSRC. In addM88 loginion, the Hong Kong SecurM88 loginies Clearing Company LimM88 logined shall be exempt from short-swing profM88 login rules under the Stock Connect scheme.
9.Improving supervision and administration.The Provisions specify the administrative regulatory or self-disciplinary measures that may be adopted by the M88 login or the exchanges.
