Recently, the China Securities Regulatory Commission issued a draft of the new regulations - the "Rules for the Implementation of Administrative Penalties for Illegal Transfer of Securities" (hereinafter referred to as the "Rules"), which aims to comprehensively upgrade the supervision of reducing holdings and crack down on various illegal stock sales.

In the past, there were many ways to reduce holdings in violation of regulations, and it was difficult to identify. This time, the "Rules" clearly divide the "illegal transfer of securities" (such as major shareholders secretly selling shares in violation of regulations) into three categories according to factors such as the type of security, who is selling, how to sell, and how harmful it is, so that the regulatory authorities can make it easier to judge and enforce the law more accurately.

In other words, in the future, whoever wants to take advantage of loopholes to sell stocks in violation of regulations will be more difficult to get by, and the punishment will be more accurate and stricter.

Three major acts of illegal transfer of securities

The China Securities Regulatory Commission has divided the behavior of "illegal stock selling" into three categories this time, so that the supervision is clearer and the punishment is more reasonable. In the vernacular:

Category 1: Hard sale when it can't be sold at all ("absolutely can't be reduced")

For example, the law prohibits the sale of certain stocks for a specific period of time, but some people still sell them secretly.

There are two types of such situations: selling the original shares during the restriction period (such as rushing to cash out as soon as they are listed); other stock sales that violate the time limit (such as major shareholders promising to reduce their holdings before the lock-up period expires).

This is the most serious violation because it directly breaks the rules of the market.

The second category: can be sold, but not sold according to the rules ("have the right but reduce holdings in violation of regulations")

For example, if the sales restriction period has passed, it can be sold, but it is sold too much, not announced in advance, or violates other regulations.

Common problems include: reducing holdings at one time exceeding the allowable percentage; failing to issue a reduction announcement 15 days in advance as required; and other procedural violations

Although this type of behavior is problematic, it is less harmful than the first category.

Category 3: The stop ("failure to suspend trading in accordance with regulations")

For example, when the change in the shareholding ratio reaches a certain threshold, trading must be suspended and announced first (this is called the "slow walking rule"), but some people do not stop. In the past, this kind of behavior was often classified as a "violation of the sales restriction period", but in fact it is different - usually not to take the opportunity to "smash the market", but to procedural negligence or improper operation

Moreover, the main shareholding reduction rules such as the "Measures for the Administration of Shareholder Reduction" do not actually include this situation. Therefore, this time the "Rules" list it separately, and the penalty scale will be more in line with the actual risk

To sum up: The new regulations divide the illegal reduction of holdings into more detailed divisions - selling indiscriminately when you can't sell (heaviest), selling indiscriminately when you can→'t sell (heaviest→), selling indiscriminately (medium), and not stopping (lighter), so as to "punish as it is", not only crack down on malicious cash-out, but also avoid "one-size-fits-all"

How to punish specifically? Look at these four categories

In order to achieve "accurate and appropriate punishment", the China Securities Regulatory Commission has set different penalties for different types of illegal stock selling in the Rules, and the more severe the penalty, the heavier the penalty. How to punish specifically? Look at these four categories:

1. The most serious: secretly selling the original shares during the restriction period

For example, when the company is just listed, the major shareholder promises not to sell within 3 years, but cashes out in advance - this is the most harmful behavior.

The penalty standard is determined according to the proportion of the selling amount: minor circumstances: no penalty or symbolic penalty;

General circumstances: 30% penalty;

Serious circumstances: 50% penalty;

The circumstances are particularly bad: up to 100% fine (equivalent to spitting out all the money earned from selling stocks).

2. Secondary serious: other stock selling behaviors that violate the "time limit"

For example, not original shares, but still sold during the legal or promised lock-up period.

The penalty is lighter than the first category, and it will be handled according to the selling amount: 0%, 20%, 30%, and 100%

3. Procedural violations: can be sold, but not operated according to regulations

For example, not announcing in advance, selling too much at one time, and not disclosing information in place.

This type of problem is mainly "process error" and less malicious, so the penalty is lighter: 0%, 10%, 20%, and 100% of the selling amount

4. The suspension does not stop: Failure to suspend trading as required

For example, when the change in shareholding reaches 5%, according to the regulations, it is necessary to stop buying and selling first, and make an announcement, but some people do not stop.

This kind of behavior is usually not for malicious smashing, so the punishment methods are also different: if there are illegal gains (such as making money from this), they will be punished according to multiples: no penalty, 3 times, 5 times, and the most serious penalty is 10 times; if the illegal gains are less than 1 million yuan (or difficult to calculate), a fixed amount will be fined:

The minimum fine is 1 million yuan,

a moderate fine of 3 million or 5 million,

The maximum fine is 10 million yuan.

In general, the new regulations pay attention to "heavy penalties for big mistakes, light punishments for small mistakes":

Malicious cash-out? Heavy fines!

Procedural negligence? Light penalty!

It not only deters violations, but also avoids excessive punishment, making law enforcement fairer and more effective.

Punishment is fairer and more transparent

The Rules also clarify what specific circumstances should be considered when determining the severity of fines to make the punishment fairer and more transparent:

1. Look at the "amount" of violations:

2. It also lists clear "plus points" and "deductions":

The purpose of this is to ensure that "accurate punishment and fair punishment" and avoid disparity in the severity of the same problem in different cases.

In addition, the Basic Rules for Administrative Penalty Discretion of the China Securities Regulatory Commission, which will come into effect on March 1, 2025, also require further refinement of the punishment standards for various cases. Therefore, the "Rules" are issued precisely to implement these superior requirements.

Finally, the China Securities Regulatory Commission said that it will carefully listen to the opinions of all sectors of society and officially release and implement it after further improvement

Three types of influence, two types of opportunities

For listed companies & shareholders:

Major shareholders, directors, supervisors and senior executives: Be sure to review compliance before reducing holdings, and don't lose big because of small things; Pre-IPO investors: The pace of exit of the original shares needs to be more cautious to avoid stepping on the red line of the "restriction period"; Proposed listed companies: The equity structure design should be more transparent, and the number of proxy holdings and nesting arrangements should be reduced

For investors:

Positive signal: the stricter the rules, the fairer the market, which is conducive to the health of the A-share ecosystem in the long run; Be wary of individual stocks: companies with a large proportion of recent lifting bans and complex shareholder backgrounds need to pay attention to the compliance risks of reducing their holdings; pay attention to compliance benchmark companies: Those companies that actively disclose and standardize operations will receive a "trust premium"

For the primary market:

The exit path is clearer: although there are more constraints, the transparency of the rules reduces uncertainty; ESG investment bonus: The "shareholder code of conduct" in corporate governance (G) will become an important evaluation dimension