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China funds & fund management
Investment funds in China are mainly governed by The Law of People’s Republic of China on Securities Investment Funds (PRC Securities Investment Funds Law) promulgated by the Standing Committee of the National People’s Congress (NPC) on 28 March 2003 and took effect on 1 June 2004. The PRC Securities Investment Funds Law represents significant progress for the purpose of laying the legal and regulatory foundation for the development of the fund industry in China.
The PRC Securities Investment Funds Law is applicable to public funds managed by fund managers with assets being held by the custodian for the benefits of the unit holders. It includes provisions governing the operation of investment funds in China (including the trading of fund units, purchase and redemption of fund units), the appointment of fund manager and custodian, and the relevant requirements in relation to disclosure of information.
Private equity funds are, at present, not governed by the PRC Securities Investment Funds Law.
Proposed major amendments to the PRC Securities Investment Funds Law issued by the Standing Committee of the NPC in 2012
The Standing Committee of the NPC is now undertaking a public consultation process in relation to various major proposed amendments to the PRC Securities Investment Funds Law. The amendments represent a comprehensive effort to regulatory both public and private investment funds in China which include the proposed bringing of private investment funds under the supervision of the China Securities Regulatory Commission (CSRC). The public is invited to submit views and submissions until 5 August 2012.
The key features of the proposed amendments include :
Regulation of private investment funds in China
Under the proposed amendments, private investment funds in China will be governed by the amended PRC Securities Investment Funds Law pursuant to which a private investment fund is only permitted to raise funds from no more than 200 qualified investors who are required to satisfy the income or asset requirements, details of which will be provided by the CSRC. Private investment funds are not permitted to advertise in public.
As compared with a public fund, a private fund will be subject to relatively relaxed requirements. Under the proposed amendments, depending on the amount of capital proposed to be raised, and the number of unit holders of the fund, the fund manager of a private investment fund is only required to register with the CSRC or the fund industry association and prior approval from the CSRC is not required.
While the launching of a public fund requires prior approval from the CSRC, under the proposed amendments, fund raising of a private investment fund is only subject to post-filing requirements required to be filed with the CSRC or a fund industry association.
Under the proposed amendments, a private fund manager is also permitted to manage a public fund, subject to the prior approval of the CSRC.
Introduction of new forms of investment funds in China
In addition to the existing contractual form, the proposed amendments introduce two additional forms of funds:
- committee form (available to both a public fund and a private fund)
- unlimited liability form (available to a private fund only)
Under the committee form, a committee as a standing body, for the purpose of supervising the day-to-day operation of the fund manager and the custodian. In an unlimited liability form fund, it is required that the fund manager or an institution with a controlling stake in the fund manager to bear unlimited liability for the liabilities of the fund.
Types of permitted investment products under the PRC Securities Investment Funds Law expanded
Under the proposed amendments, in addition to listed shares and bonds, a public fund is permitted to further invest in other types of securities and investment products (including derivatives) as determined by the CSRC.