This August, the Chinese Insurance Regulatory Committee disclosed its provisional measures on equity investments made by Insurance Funds ("Equity Investment Measures"). With the introduction of the new PRC Insurance law in October 2009, domestic insurance companies have begun making equity investments into private companies. The new Equity Investment Measures lay out a detailed framework outlining the ways in which insurance companies may participate in direct and indirect equity investment activities, including investments in private joint-stock companies and LLCs.
The Equity Investment Measures is significant because it serves as the first set of guidelines to express the methods in which institutions providing insurance can invest their funds into different companies.
The Measures stipulate that insurance institutions must meet certain basic management standards before making equity investments in privately owned companies. For example, insurance companies that wish to make direct equity investments in privately held companies must have a sound corporate governance structure and good internal controls. Furthermore, insurance companies must meet certain basic solvency and total asset requirements before making equity investments. In addition, if an insurance institution would like to make indirect investments by purchasing company equity related financial products it must meet the same standards as necessary for companies wishing to make direct equity investments.
The Measures also clarify what kinds of companies insurance institutions can directly invest in, and what basic management and debt standards those companies must meet before being considered as investment targets. The Measures make it clear that insurance institutions can only directly invest in other insurance institutions, finance companies that are not insurance related and companies that are connected to the insurance industry. This includes medical clinics and hospitals, companies that provide annuities and auto service companies.
Furthermore, the Equity Measures state that when an insurance institution wishes to take a controlling stake in another company it must use its own capital to make that investment. If the institution will not take a controlling interest in a company, then it may use its liability reserve funds in addition to its own capital to make the purchase. The same regulation is applied in regards to indirect company acquisitions. Finally, the Measures stipulate that it is forbidden for insurance entities to directly or indirectly invest in equity through loans or the issuance of securities.
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