China is intensifying its crackdown on irregular share disposals by listed companies' major shareholders, as new draft rules seek to reduce enforcement discretion, enhance market fairness and improve investor protections, officials and experts said.

The China Securities Regulatory Commission, the country's top stock market regulator, released draft implementation rules on Friday detailing the definition and punishment of illicit securities transfers.

Classifying different types of irregular shareholding reductions and setting out tiered penalty standards, the draft is aimed at "comprehensively improving the regulatory framework for share reductions and severely cracking down on various forms of irregular share disposals", the CSRC said. The draft is open for public consultation till May 17.

Sources familiar with the matter told China Daily that the rules seek to reduce enforcement discretion in administrative penalties on irregular share disposals, thus improving regulatory transparency and predictability.

They said that, upon implementation of the draft rules, the overall intensity of penalties is expected to remain broadly stable while being moderately strengthened, reinforcing the crackdown on such misconduct that harms the legitimate rights of minority and retail investors.

Rather than introducing new restrictions, the draft rules codify existing enforcement practices in line with the revised Securities Law, effective in 2020, helping standardize regulatory actions.

For the most serious violations, such as transferring original shares during restricted periods, cases involving more than 5 percent of a listed company's total shares and exceeding 500 million yuan ($73.3 million) in value would face fines ranging from more than 50 percent to up to 100 percent of the unauthorized transaction amount, the draft said.

By contrast, such cases involving under 2 percent of total shares — or less than 40 million yuan — would incur fines of less than 30 percent, the draft said, while other cases fall into a mid-tier category with penalties between 30 and 50 percent.

Liu Jipeng, a professor at China University of Political Science and Law and a senior capital market expert, described the rules as "a necessary step in the right direction", adding that regulating major shareholders' share disposals is critical to safeguarding market fairness and protecting minority investors.

Liu said that original shareholders, who typically hold shares at very low cost, can realize substantial gains through share disposals in the secondary market. In some cases, irregular or disguised share sales before exiting or transferring control can deal a blow to investor confidence and market order.

JamThame Capital, a domestic investment institution, said in a note that the draft rules send a positive signal as stronger regulatory discipline will enhance fairness and support the long-term vibrancy of China's equity market.

Greater transparency will also help reduce regulatory uncertainty for primary market investors seeking to exit via the secondary market by clarifying expectations around share disposals, the note said.

China's A-share market extended gains on Monday, with the benchmark Shanghai Composite Index up 0.76 percent to close at 4082.13 points, continuing to show resilience amid the recent global market volatility. The Shenzhen Component Index closed 0.55 percent higher at 14966.75 points.

However, Liu cautioned that focusing solely on illegal disposals addresses only part of the issue.

A more fundamental challenge lies in the sizable pressure from "compliant" share sales, which stems from highly concentrated ownership structures in some listed firms.

To tackle the root cause, he suggested improving institutional design at the pre-listing stage. The biggest shareholder could transfer a meaningful portion of shares to private equity funds before going public, thereby enhancing ownership diversification and reducing post-listing selling pressure.

Compared with many mature overseas markets, China's regulatory stance on illegal share disposals is stricter, analysts said. In May 2024, China introduced interim rules on listed company shareholder share reductions to curb irregular and circumvention practices.