China securities regulator mulls new investor protection agency: report

SHANGHAI Sun Dec 9, 2012 10:07pm EST

Chairman of the China Securities Regulatory Commission Guo Shuqing talks during a news conference held on the sidelines of the 18th National Party Congress (NPC) in Beijing November 11, 2012. REUTERS/David Gray

Chairman of the China Securities Regulatory Commission Guo Shuqing talks during a news conference held on the sidelines of the 18th National Party Congress (NPC) in Beijing November 11, 2012.

Credit: Reuters/David Gray

SHANGHAI (Reuters) - China may create an agency that could file corporate governance lawsuits on behalf of individual investors as regulators attempt to restore confidence in the country's struggling domestic equities markets, the official Shanghai Securities News reported on Monday.

China Securities Regulatory Commission (CSRC) head Guo Shuqing said he is considering establishing one or more agencies that would buy shares in listed Chinese companies, which would allow the agency to participate in shareholder meetings and file complaints or lawsuits to protect the interests of retail investors.

"A public company must have strong corporate citizenship and not allow controlling shareholders to arbitrarily intervene in excess of their legal rights at the expense of the interests of small and medium-sized shareholders. This is the only way to win the trust of the market," Guo said in the report.

The agency would be focused on helping small shareholders fight decisions by company management that are legal yet contrary to shareholder interests. Examples of such behavior include the widespread practice by Chinese listed firms of sitting on cash instead of paying out dividends, repeatedly fundraising through new share issuances that dilute the value of existing shares, and acquiring other companies from related parties at inflated prices.

While small investors are technically able to file their own lawsuits, Guo said that because it is impractical for most of them to do so, an agency that could act on their behalf might prove more effective.

The CSRC has enacted incremental reforms to domestic bourses in 2012 in hopes of encouraging value-oriented investors to return to the market. The moves include reducing trading transaction fees, increasing quotas for foreign investors and reforms to the initial public offering process.

Both the CSI300 Index, which tracks the largest stocks in Shanghai and Shenzhen, and the Shanghai Composite Index, which tracks all the companies listed in Shanghai, hit their lowest point since 2009 in the first week of December.

Markets have recovered slightly since then, but still look set to close out a third consecutive year in negative territory, barring an abrupt recovery.

While Chinese macroeconomic indicators have shown signs of recovery in recent months, the improved sentiment has yet to trickle down to domestic equities markets, causing some analysts to question whether a sustainable stock market revival is actually around the corner.

However, foreign interest in Chinese stocks - in particular those listed in Hong Kong - has strengthened in recent months.

(Reporting by Pete Sweeney; Editing by Matt Driskill)