Implementing the Requirement of "Tackling Chaos" and Focusing on the Goal of "Improving Quality" - SSE Informs the Disciplinary Work of Listed Companies in 2022

In 2022, the disciplinary work of companies listed on Shanghai Stock Exchange (SSE) was closely focused on the theme of promoting the improvement of quality of listed companies, implementing the requirement of "tackling chaos", focusing on the goal of "improving the quality", continuously strengthening the supervision, attaching importance to the humanistic supervision, centering on key areas of supervision and safeguarding the order of "open, fair and just" in the capital market. In response to the information disclosure violations by listed companies and related subjects, the SSE issued 186 disciplinary decisions in 2022, with an increase of 21% year on year, 189 written warning decisions, with an increase of 17% year on year, and 322 verbal warnings. It involves 224 listed companies, 103 controlling shareholders and actual controllers, 898 directors, supervisors and senior management members and 81 general shareholders. The disciplinary work for the whole year is as follows.

Continuing to strengthen supervision

During this year, the SSE effectively performed its front-line supervisory duties, cracked down on violations of listed companies and implemented effective disciplinary actions to promote the enhancement of the compliant operation of listed companies. I. Continuous increase in disciplinary measures. For the severe violations, the SSE imposed the "top" punishments including issuing 56 public condemnations throughout the year, with an increase of 37% year on year, and public identification of 26 persons to be unfit to act as directors, supervisors and senior management members of listed companies (hereinafter referred to as public identification), with an increase of 117% year on year. II. Severe punishment for vicious cases. For financial fraud, occupation of funds, illegal guarantee and other vicious violations, every case must be investigated and every penalty must be strict. The SSE publicly condemned the financial fraud, occupation and guarantees that failed to be rectified timely. For the circumstances that were particularly serious, the main responsible persons were publicly identified. III. Rigorous investigation for the "principal culprit". The SSE fully implemented the provisions of the new edition of Securities Law and supporting regulations and rules, cracked down on violations that undermined the independence and undercut the interests of listed companies. Those controlling shareholders and actual controllers who led the implementation of violations of huge fund occupation and illegal guarantees would be imposed the top punishments. IV. Identifying minor issues of violations on the STAR Market early. The SSE has always handled strictly and fast and adhered to tackling minor issues early for the violations on the STAR Market. For example, in the case of inaccurate disclosure of periodic reports of Qingcloud Technologies Corp. and Wuhan Lincontrol Automotive Electronics Co., Ltd, the SSE gave timely regulatory warnings to achieve quick investigation and quick handling.

Focusing on the humanistic supervision

With the increasing complexity of violations, the disposal of violations and risk mitigation are intertwined. While adhering to "zero tolerance" to combat violations of laws and regulations, the SSE also focuses on balancing the strength and humanization, efficiency and fairness of supervision, distinguishing the background of violations, subjective culpability, consequences of violations and rectification, etc., and handled them realistically in line with the laws and regulations to prevent "one-size-fits-all" approach in supervision. I. Reasonably considering the factors of the pandemic. In response to the decisions and arrangements of the CPC Central Committee on efficient coordination of pandemic prevention and control and economic and social development, the factor of the pandemic should be effectively considered in the case processing, as well as the type of violation and industry characteristics of the company. By doing so, it could mitigate or remit the punishment depending on the circumstances. II. Steadily linking the processes of risk resolution. For listed companies involved in the disposal of significant risks, the objectives of proper disposal and risk resolution shall be taken into account in the disciplinary work, making adaptive arrangements for disciplinary standards, implementation procedures and decision-making mechanisms and strengthening regulatory collaboration. III. Fully taking into consideration the actual result of rectification. For occupation of funds and illegal guarantees, the SSE continued to urge listed companies and relevant subjects to complete rectification by the deadline according to the idea of "allowing time for real rectification", and took it as an important factor for mitigation of penalty. IV. Focusing on the performance of duties. For the "honest mistakes" made by parties concerned, who have performed certain acts of due diligence and did not cause actual damage or caused minor damage, the SSE would take a moderate or mitigated approach to them during the separation of responsibilities, with warning and education as the goal.

Focusing on key supervision areas

This year, the disciplinary work of SSE listed companies continued to implement the goals of "tackling chaos" and "improving quality", focusing on areas such as financial fraud, illegal guarantees, the performance of duties by directors, supervisors and senior management members in the disclosure of periodic reports, companies' violations in delisting and the performance of intermediaries, to respond to market concerns through the focus of regulation. The violations in the relevant areas are characterized as follows.

I. Covert financial fraud means and rigorous punishment. To crack down on financial fraud and carry out special campaign to prevent financial fraud are always important steps to promote the improvement of quality of listed companies. This is expected to adopt combined measures through strengthening the detection and investigation to effectively increase the cost of violations. In 2022, the SSE issued a total of 6 public condemnations on financial fraud, a 50% year-on-year increase, and public identification of 14 persons, representing a significant year-on-year increase. Besides, the relevant companies received administrative penalties and the main responsible persons were banned from the market. There are several characteristics to such cases. The first is persistent and systematic fraud, such as implementing falsification through private network communication services. The second is multiple turnover of funds, such as the delisted Xinjiang Yilu Wanyuan Industrial Investment Holding Co., Ltd.'s inflated factoring business, with its funds cycling more than 20 times. The third is completeness of fraud chain, with cooperation from upstream and downstream and related institutions, such as ST Guangdong Rongtai Industry Co., Ltd circulating its funds through several related parties and third-party institutions that were held on its behalf.

II. Remarkable rectification results of occupation of funds and illegal guarantee. Occupation of funds and illegal guarantee would directly infringe the interests of listed companies, reflecting the problems of governance irregularities of "Shareholders' Meeting, the Board of Directors and the Board of Supervisors" and internal control failures. In 2022, the SSE issued a total of 22 public condemnations, public identification of 14 persons, 15 notices on criticism and 14 regulatory warnings. At present, the situation has been greatly improved. Among the cases handled in 2022, 39 companies completely returned the occupied funds and released the illegal guarantees within the time limit, with a rectification rate of nearly 80%. Most of these occupations and guarantees occurred in previous years, with only 5 cases involving new occupations and guarantees, accounting for nearly 10% of all violations.

III. Different situations of the performance of duties by directors, supervisors and senior management members in the non-guarantee of authenticity of periodic reports. Some directors, supervisors and senior management members were unable to guarantee the authenticity, accuracy and completeness of periodic reports and even refused to sign written confirmation opinions to avoid legal responsibilities. A total of 12 such cases were handled throughout the year, which had the following characteristics. The first is failing to perform duties at all or express opinions, such as a supervisor of the delisted Chunghsin Technology Group Co., Ltd. who was publicly condemned for this reason. The second is relying excessively on the opinions of intermediaries and having their duties performed by external organizations, such as a supervisor of the delisted Zhongxing Tianheng Energy Technology (Beijing) Co., Ltd. who refused to guarantee the authenticity, accuracy and completeness of the annual report merely for being unable to express an opinion on the audit report and internal control audit report. The third is that companies should also be held liable if there is evidence that they did not provide adequate conditions for directors, supervisors and senior management members to perform their duties related to annual report review. For example, Jiangsu Wanlin Modern Logistics Co., Ltd. was punished for not sending annual report review materials to independent directors until 2 o'clock on the day of the meeting of the Board of Directors.

IV. Frequent and severe violations of delisted companies. Since 2022, during its accelerated promotion of the regular delisting mechanism, the SSE has upheld the principle of "no exemption after delisting" for violations of delisted companies and imposed severe punishments. Regarding the violations of delisted companies, the first is high proportion. Of the 18 companies forced to delist in 2022, 14 were found to have violations, accounting for 78%. The second is large number of violations. Of the companies forced to delist, 10 had three or more violations, accounting for 56%. The third is large number of vicious violations. Of the companies forced to delist, 2 were involved in financial fraud, 3 in occupation of funds, and 3 in illegal guarantees. Among them, the delisted Xin Jiang Ready Health Industry Co., Ltd. was involved in all three aforementioned violations.

V. The awareness of intermediaries as "gatekeepers" still needs to be enhanced. During this year's investigation into information disclosure violations by listed companies, some intermediaries were found to have failed to perform their due diligence and violated information disclosure rules, which were subject to self-regulatory punishments. In 2022, the SSE issued 2 notices of criticism and 3 regulatory warnings, involving 6 sponsor representatives from 3 intermediaries and 3 sponsors of financial advisory programs. First, they failed to fully examine the company's violations and issued inaccurate verification opinions, such as Amethystum Storage Technology Co., Ltd.'s sponsor representative. Second, they failed to effectively supervise the company to improve its internal control and issued inaccurate supervision opinions during the continuous supervision period, such as Essence Information Technology Co., Ltd.'s sponsor representative.

In 2023, with the implementation of the new round of Three-year Action Plan for Advancing Quality Improvement of SSE-listed Companies, the disciplinary work of SSE listed companies will continue to focus on improving quality of listed companies, constantly implementing the regular and long-term mechanism of inspection and rectification, follow the requirements of "zero tolerance" and "three timely", strictly crack down on major vicious violations, prudently handle complex and difficult cases, emphasize the protection of the legitimate rights and interests of small and medium-sized investors, actively respond to the new situation and new requirements of capital market regulation, and strive to promote the high-quality development of the capital market.