Article 44 of the Securities Law (amended 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 senior 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 generated (if any) shall be returned to the company (the “Short-Swing Profit Rules”).
On July 21, 2023, the China Securities Regulatory Commission (“CSRC”) released Certain Provisions on Improving the Regulation of Trading Related to Short-Swing Profit Rules (Consultation Paper) (the “Provisions”). According to the draft notes released together with 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 profit 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 senior management personnel of such listed companies (the “Specific Investors”). The short-swing profit rules shall apply to a large shareholder, director, supervisor, or senior officer at the time of buying and selling securities. If not yet a large shareholder, director, supervisor, or senior officer at the time of buying securities while becoming a large shareholder, director, supervisor, or senior officer at the time of selling securities, the short-swing profit rules shall also apply.
2. Specifying the calculation standards of the securities 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 senior management personnel, and the securities held by the spouse, parents, and children of such large shareholders, directors, supervisors and senior management 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 securities shall be subject to short-swing profit rules. The Provisions specify that, in addition to the stocks of a listed company or a NEEQ-listed company, the trading of depository receipts, exchangeable bonds, convertible bonds, and other equity-type securities shall be subject to short-swing profit rules.
4. Securities holdings shall be calculated separately for different types of securities. The Provisions clarify that the securities holdings shall be calculated separately for different 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 current market practice as well as the fact that it is difficult to calculate income arising from trading in different types of securities concurrently.
5. Defining “securities purchase and sale” under short-swing profit rules. The Provisions specify that “securities purchase and sale” must have a payment 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 different scenarios.
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-lending, non-trade activities such as inheritance and donation, the free transfer of state-owned equity, private placement by NEEQ-listed companies, activities relating to the exercise of incentive stock options, securities companies’ purchase of unsold shares, and market-making.
7. Rules for domestic institutions. 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 pension 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 management 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 investment management mode as public fund managers, may file an application to calculate their securities holdings based on every single product.
8. Rules for foreign institutions. In principle, foreign institutions shall calculate securities holdings on the manager level. In accordance with the principle that “the same rule should apply equally to domestic and foreign institutions”, qualified foreign public funds are allowed to calculate securities holdings on a product basis with approval from the CSRC. In addition, the Hong Kong Securities Clearing Company Limited shall be exempt from short-swing profit 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 CSRC or the exchanges.
For further information, please contact:
XIE, Qing (Natasha), Partner, JunHe