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How does a foreign investor set up a financial institution in the PRC?

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How does a foreign investor set up a financial institution in the PRC?

4. Securities Investment Fund Management Companies

According to the CSRC, as at March 2014, there were 91 fund management companies in the PRC, 47 of which are Sino-foreign joint venture fund management companies. The list of fund management companies is available at http://www.csrc.gov.cn/pub/zjhpublic/G00306208/201404/t20140415_247032.htm.

A. Definition

Securities investment fund management companies (“Fund Management Companies”) refer to corporations incorporated in the PRC which have been approved by the CSRC to conduct securities investment fund management business.

B. Applicable laws

The Securities Investment Funds Law (中华人民共和国证券投资基金法), effective from October 2003 and last amended in December 2012 (“Securities Investment Fund Law”), and The Measures for the Administration of Securities Investment Fund Management Companies (证券投资基金管理公司管理办法), effective from October 2004 (“Fund Management Companies Measures”) are the main laws and regulations establishing the entry standards and other requirements for fund management companies.

C. Primary regulator

The CSRC is the primary regulatory authority of the securities investment fund market of the PRC and is also responsible for approving foreign investment in Fund Management Companies in China. The CSRC website is http://www.csrc.gov.cn.

D. Restriction on foreign investments

According to the Catalogue, the proportion of foreign investment in a Fund Management Company must not exceed 49%.

E. Capital requirement

According to the Fund Management Companies Measures, a Fund Management Company must have registered capital of at least RMB 100 million, which must be contributed in full in one lump sum. Foreign investors must make capital contributions in freely convertible currencies.

F. Requirements for Fund Management Companies

General Requirements

A proposed Fund Management Company is required to meet the following requirements of the CSRC in seeking its approval for establishment:

  1. its shareholders must comply with the provisions of the Securities Investment Fund Law and the Fund Management Companies Measures;
  2. the articles of association of the proposed Fund Management Company must comply with the Securities Investment Fund Law, the Companies Law and the relevant requirements of the CSRC;
  3. the proposed Fund Management Company must have senior management who are in compliance with applicable laws, administrative regulations and CSRC requirements;
  4. it must have staff engaged in research, investment, valuation and marketing shall have obtain funds practice qualification;
  5. it must have at least 15 senior managers and business personnel who have obtained qualifications in fund management;
  6. the proposed Fund Management Company must have good internal control systems that are in compliance with the requirements of the CSRC for supervision, auditing and risk control;
  7. the proposed Fund Management Company must have business premises, security facilities and other facilities which satisfy the relevant requirements relevant to fund management business;
  8. there must be an appropriate division of work and employees’ roles should be clearly delineated;
  9. a system of internal controls must be in place covering supervision, audit and risk management; and
  10. other conditions as prescribed by the CSRC with the approval of the State Council.

G. Conditions in relation to shareholders holding 5% or more interest in a Fund Management Company

According to the Fund Management Companies Measures, any shareholder of a proposed Fund Management Company whose capital contribution or shareholding accounts for 5% or more of the registered capital of a proposed Fund Management Company (hereinafter referred to as the “Shareholding Proportion”) must satisfy the following conditions:

  1. the registered capital and net assets of such shareholder must be at least RMB 100 million and the assets must be of good quality;
  2. the shareholder must have been in operation for at least three consecutive financial years and have sound corporate governance and internal control systems;
  3. the shareholder must not have incurred any criminal or administrative penalty for violation of any law or regulation in the previous 3 years;
  4. the shareholder must not have misappropriated clients’ assets or committed any other conduct impairing clients’ interests;
  5. the shareholder must not be under investigation by any regulatory authority for violation of any law or regulation; and
  6. the shareholder must have a good reputation and must have no record of breach or infringement of any requirement in relation to financial supervision, taxation, industry and commerce, etc. in the previous 3 years.

H. Additional Conditions in relation to the major shareholders of a Fund Management Company

The major shareholders of a Fund Management Company are those shareholders holding 25% or more.

The Fund Management Companies Measures provide that, in addition to the requirements in relation to shareholders holding 5% or more of a Fund Management Company (as described above), a major shareholder is additionally required to meet the following conditions:

  1. it must be engaged in securities management, securities investment consulting, trust assets management or other financial assets management businesses;
  2. it must have registered capital of at least RMB 300 million; and
  3. it must have good business performance and good quality assets.

I. Additional Conditions in relation to investors of a Sino-Foreign Joint Fund Management Company (“JV Fund Management Company”)

In a JV Fund Management Company, the domestic shareholder that has the highest shareholding among domestic shareholders must meet the conditions relating to major shareholders as set out in paragraph H above.

The Fund Management Companies Measures additionally require a foreign investor of a JV Fund Management Company to satisfy the following conditions:

  1. it must be a financial institution lawfully established under the laws of its home country/region which has financial asset management experience, is in sound financial condition and has a good credit rating, and has not been subject to any penalty imposed by any regulatory or judicial authority in the previous 3 years;
  2. the home country/region of the foreign investor must have sound securities laws and regulations, and the securities regulatory authority in such jurisdiction must have entered into a MOU on securities regulatory cooperation with the CSRC or any other institution recognised by the CSRC and must maintain an effective relationship for regulatory cooperation; (Note: we understand that the CSRC signed a MOU regarding Securities and Futures Regulatory Cooperation with the Russian Federal Financial Markets Service (FFMS) in Beijing on 8 August 2008)
  3. the foreign shareholder must have paid-up capital in a freely convertible currency equivalent to at least RMB 300 million; and
  4. other conditions as prescribed by the CSRC with the approval of the State Council.

J. Other requirements or restrictions in relation to shareholders of a Fund Management Company

The Fund Management Companies Measures further require that:

  1. an institution or institutions under the control of the same de facto controller cannot invest in more than two Fund Management Companies, and may hold a controlling interest in only one Fund Management Company;
  2. major shareholders of a Fund Management Company are required to undertake in writing that they will hold the shares in the Fund Management Company for at least 3 years; and
  3. where a single shareholder, alone or in conjunction with any related shareholders, holds 50% or more of the shares of a Fund Management Company, such shareholder, and institutions controlled by such shareholder, must not engage in the business of asset management in relation to publicly offered (or similar to public offered) securities.

K. Requirements in relation to the composition of the board of a Fund Management Company

The Fund Management Companies Measures require that:

  1. the general manager of a Fund Management Company must be a member of the board of directors of such fund management company;
  2. where a single shareholder, alone or in conjunction with any related shareholders, holds 50% or more of the shares of a Fund Management Company, the number of directors related to such shareholder must not exceed one third of the board of directors;
  3. the board of directors of a Fund Management Company must include at least 3 independent directors and the Fund Management Company must appoint independent directors representing at least one-third of the board.

L. Scope of business

A Fund Management Company raises funds from the public and conducts securities investment fund management and other business permitted by the CSRC.

M. Time frame for approval

The CSRC decides whether or not to approve an application for the establishment of a fund management company within 6 months of accepting the application. In the case of an unsuccessful application, the CSRC will give reasons for the not granting approval.

N. Acquisition of shares of a Fund Management Company

The Fund Management Companies Measures require that the following events are reported to the CSRC for approval: (i) any change of shareholder holding 5% or more of the shares of a Fund Management Company; (ii) any change of shareholder holding less than 5% of the shares of a Fund Management Company where this has a significant impact on corporate governance; and (iii) any change in the percentage of shares held by any shareholder holding more than 5% of the shares of a Fund Management Company. Any change of shareholders or change to the shareholding structure of a Fund Management Company must comply with the requirements of the CSRC.

In addition, any change of (i) a major shareholder, (ii) a shareholder holding in aggregate more than 50% of the shares; or (iii) the shareholder who has nominated the largest number of directors of a Fund Management Company, will be subject to approval procedures and requirements as for a new application for the establishment of a fund management company.

5. Futures Companies

A. Definition

Futures companies (“Futures Companies”) are defined as financial institutions engaging in futures business established in accordance with the Companies Law and the Futures Trading Administrative Regulations (期货交易管理条例), which became effective from April 2007 (the “Futures Administrative Regulations”).

B. Applicable laws

The Futures Administrative Regulations and the Administrative Measures for Futures Companies (期货公司管理办法) which became effective from April 2007) (the “Futures Companies Administrative Measures”) are the main laws and regulations establishing the entry standards and other requirements for futures companies.

The CSRC however published a consultation paper seeking views on its proposed Regulatory and Administrative Measures for Futures Companies (“Proposed New Futures Companies Administrative Measures”) on 29 August 2014 which, if implemented, will supersede the current Futures Companies Administrative Measures. The consultation period will end on 28 September 2014.

C. Primary regulator

The CSRC is the primary regulatory authority for the PRC’s securities and futures market and is also responsible for approving foreign investment to set up Futures Companies in China. The website of CSRC is at http://www.csrc.gov.cn.

D. Scope of business

The current Futures Companies Administrative Measures allow registered Futures Companies to conduct trading in commodity futures for clients. Trading in financial futures for clients requires a separate application to be made to the CSRC.

Under the Proposed New Futures Companies Administrative Measures, registered Futures Companies will continue to be allowed to trade commodity futures for clients. The following businesses will require a separate application to the CSRC: trading financial futures on clients’ behalf, trading offshore futures, futures investment consultancy or futures asset management.

E. Restriction on foreign investment

Current restrictions

According to the Catalogue, a Chinese party has to be the controlling shareholder of a futures company.

The Futures Companies Provisions promulgated in May 2012 impose the following restrictions on foreign investment, direct and indirect, in a Futures Company:

  1. if a foreign investor, together with its related parties, directly or indirectly owns or controls 5% or more of the shares of a Futures Company, the Futures Companies Administrative Measures prevent the investor, from holding, directly or indirectly, 5% or more of any other Futures Company (i.e. a foreign investor can only hold an interest of 5% or more in one Futures Company);
  2. a single foreign investor and its related parties are not allowed to indirectly own (through controlled corporations or otherwise) or control (through possession of voting rights) 5% or more of the shares of a Futures Company unless the following conditions for foreign-funded futures companies prescribed by the Catalogue are satisfied:
    1. the foreign investor holds shares or voting rights in a Futures Company indirectly through ownership of shares in a PRC listed company, provided that the controlling shareholder, the largest shareholder, and the person exercising actual control of the listed company are all Chinese investors; and
    2. the foreign investor holds shares or voting rights in a Futures Company indirectly through ownership of shares in a PRC securities company which is licenced to conduct more than three types of business including securities brokerage, proprietary trading and securities asset management business.

      It should be noted that where foreign investors rely on the above exceptions, their investment will still be subject to the restriction contained in the current Catalogue that only a Chinese investor can be a controlling shareholder of a Futures Company .

Proposal under the Proposed New Futures Companies Administrative Measures

Under the Proposed New Futures Companies Administrative Measures, foreign investment in Futures Companies will be allowed, but subject to the limits set by the PRC government. We construe this to mean that only a Chinese investor can be a controlling shareholder of a futures company as is provided under the current Catalogue.

F. Capital requirement

According to the Futures Administrative Regulations and the Futures Companies Administrative Measures, the minimum registered capital of a proposed Futures Company is RMB 30 million. The registered capital must be paid-up capital. Shareholders are required to contribute in cash or with non-monetary assets which are necessary for the operations of the Futures Company, but the proportion of cash contribution must be at least 85%.

G. Requirements for Futures Companies

General requirements

Set out below are other current major requirements in relation to the establishment of a Futures Company:

  1. the directors, supervisors and senior management of the proposed Futures Company must be qualified to conduct futures trading;
  2. there must be at least 15 staff qualified to conduct futures trading;
  3. there must be at least three senior management staff qualified to conduct futures trading;
  4. the articles of association of the proposed Futures Company must comply with the requirements of applicable laws and regulations;
  5. the major shareholders and the de facto controller of the proposed Futures Company must be able to make profits on a sustained basis, must have a good reputation and must not have materially violated any applicable laws or regulations in the previous 3 years;
  6. the proposed Futures Company must have appropriate business premises and facilities for its operations; and
  7. the proposed Futures Company must have sound risk management and internal control systems.

The above requirements are retained in the Proposed New Futures Companies Administrative Measures.

Conditions in relation to the shareholders of a proposed Futures Company

According to the current Futures Companies Administrative Measures, the shareholders of a proposed Futures Company must be PRC legal persons (such as a WFOE). Shareholders holding 5% or more of the shares of a proposed Futures Company are required to meet, inter alia, the following conditions:

  1. their paid-in capital or net assets must be at least RMB 30 million;
  2. the shareholder must have been operating for at least 2 complete financial years and been profitable for at least one of the most recent 2 financial years, or have paid-in capital and net assets of at least RMB 200 million;
  3. the value of net assets must be equal to 50% or more of the paid-in capital, or its contingent liabilities must be less than 50% of the net asset value, and there must not be any other risks which could materially affect the Futures Company’s financial condition;
  4. the shareholder’s accumulated long-term equity investments including its capital contributions to the Futures Company must not exceed its own net assets;
  5. it must not have any significant unpaid debt;
  6. the shareholder must not have had any administrative or criminal penalty imposed on it for conducting its business in violation of applicable laws or regulations in the previous 3 years;
  7. the shareholder must not have been the subject of any investigation or order by any competent authority in relation to the conduct of business in violation of applicable laws and regulations;
  8. the shareholder or actual controller of a financial institution, or the controlling shareholder or actual controller of a listed company, must not have abused its rights as a shareholder, avoided its obligations as shareholder or have committed any other act of bad faith in the previous 3 years;
  9. any shareholder who is a natural person, legal representative and senior manager must not have been prohibited from entering the securities or futures market at any time in the previous 2 years, and must not have been disqualified from assuming the position of a securities or futures senior manager at any time in the previous 2 years, and none of the circumstances set out in paragraph 1 of Article 147 of the Companies Law must exist; and
  10. other conditions as prescribed by the CSRC.

The above conditions are retained in the Proposed New Futures Companies Administrative Measures. In addition, the Proposed New Futures Companies Administrative Measures proposed that individuals should be eligible to be shareholders of a Futures Company if, in addition to satisfying the above conditions, the individual shareholder owns financial assets of at least RMB 30 million.

H. Timeframe for approval

The CSRC will make a decision as to whether or not to approve an application for the establishment of a Futures Company within 6 months after accepting an application.

Skills

Posted on

2014-11-06