(Yicai Global) Aug. 24 -- Companies listed on China's mainland stock markets that have been found to have fiddled their books may be asked to repurchase their shares at market price, the country's securities regulator said as it cracks down on fraud.

The China Securities Regulatory Commission is considering making companies that are found to have concealed material facts or fabricated major content during the listing, refinancing, merger and acquisition as well as restructuring processes buy back their shares at market price, according to a draft policy issued by the CSRC on Aug. 21.

This would be a significantly bigger penalty than the current maximum fine of CNY10 million (USD1.4 million) or CNY 20 million and could run into the hundreds of million or even billions of yuan.

The new measure would ensure that companies found to have committed fraud have to spend the same money they raised in an initial public offering to buy back the shares issued, industrial insiders told Yicai Global.

"The forced repurchase measure has the advantage of being highly efficient, involves a large compensation amount, extends to a large number of beneficiaries and offers a strong deterrent force," Li Jian, a lawyer of Zhejiang Yufeng Law Firm, told Yicai Global.

While it is prudent of the CSRC to maintain market order and protect the rights of investors, the regulator should also attach importance to safeguarding the legitimate rights and interests of any victims involved, Tang Xin, a law professor from Tsinghua University, told Yicai Global.

The new rule would be applicable to all stock markets in China that adopt a registration-based funding system. The Shenzhen Stock Exchange's ChiNext board started to adopt such a system for new IPO applicants from today, following in the footsteps of the Shanghai Stock Exchange's Star Market, which began trading last July.

However, the regulator still needs to secure the source of the buyback funds, said Li, a lawyer. "Forced repurchase may become empty talk if the funds raised were quickly spent or transferred, or the controlling shareholders pledge to cash out most of their shares," he said. There needs to be a mechanism that can enable the emergency freezing of funds and can limit the cashing out of shares by controlling shareholders, he added.

As this measure is relatively new and there is little overseas experience to use as reference, the current implementation measures do not specify applicable enforcement scenarios, the CSRC added. The draft also specified implementation methods for the repurchase price, the objects of repurchase, the repurchase procedures and other details.

Editors: Tang Shihua, Kim Taylor