Originally published 13 January 2011

Keywords: foreign investment, fund managers, Shanghai, PRC law, pilot enterprise


After a long wait since foreign investment in partnerships formed under PRC law was first permitted on 1 March 2010, the authorities in Shanghai jointly published Implementing Measures for a Pilot Program in respect of Foreign Invested Private Equity Investment Enterprises (the "Measures") on 11 January 2011.

The Measures set out revised procedures for registering foreign invested private equity investment funds and fund management enterprises in Shanghai. In this respect, the Measures replace the Tentative Measures for Establishing Foreign Invested Equity Investment Management Enterprises which expired on 30 June 2010.

The Measures also break new ground in prescribing the qualifications for a 'pilot enterprise' by a joint committee comprising representatives of no less than 14 municipal agencies in Shanghai.

Qualification as a Pilot Enterprise

Foreign invested private equity investment funds and fund management enterprises registered in Shanghai may apply to qualify as a pilot enterprise pursuant to the Measures.

Applications may be made to the Shanghai Financial Services Office which arranges for review by the joint committee.

The benefit for a fund management enterprise in being a pilot enterprise is that it is entitled to convert foreign currency capital, equal to an amount of up to 5% of the fund size, into RMB, as its capital contribution to the fund whereas previously the limit was expressed to be 1% of the fund size.

The Measures clarify that any such capital contribution will not taint the "original nature" of the fund i.e. in the absence of other foreign investors, the fund could still be treated as a pure domestic fund, and thus not subject to foreign investment restrictions.

The benefit for a private equity investment fund in being a pilot enterprise is that capital commitments can be denominated in a foreign currency and converted into RMB. It is expected that the proportion of the fund size that may take the form of a capital commitment denominated in a foreign currency or the per investor limit on making a capital commitment denominated in a foreign currency will form part of the application and approved by the joint committee on a case by case basis.

The foreign investors in a pilot enterprise are expected to include sovereign wealth funds, pension funds, endowment funds, charitable funds, funds of funds (FOFs), insurance companies, banks, securities companies and other institutional investors approved by the joint committee. The indicative list suggests that preference may be given to long term, institutional investors.

Such foreign investors should meet the following requirements:

  1. in the fiscal year preceding that in which the application is made, proprietary assets of no less than US$500 million or assets under management of no less than US$1 billion, as the case may be;
  2. good corporate governance and internal control policies;
  3. not having been subject to any judicial or regulatory penalties in the preceding two years; and
  4. more than five years' relevant investment experience (which will be deemed satisfied if an investor's affiliate meets such requirement).

The general partner (or an affiliate) of a private equity investment fund must have at least three years' relevant experience of investing in PRC enterprises.

A pilot enterprise is required to file semi-annual reports with the relevant agencies in the district where it is registered, disclosing material events including, among others, investments, changes to partnership agreement, changes to registered capital (or contributions), senior personnel change, etc.

The custodian bank of a pilot enterprise is also required to file, in addition to an annual report, regular reports with the joint committee on cash flow and portfolio investments of such pilot enterprise, and monitor the investment operations of such pilot enterprise.

Registration as a Foreign Invested Management Enterprise

Applications are made to Shanghai Administration of Industry and Commerce ("SAIC"), and in the case of a management enterprise in the form of a corporation, with prior approval from Shanghai Ministry of Commerce.

The Measures contain a new requirement for there to be at least two senior personnel with:

  1. at least five years' experience in private equity investment or private equity investment management business;
  2. at least two years' experience in a senior management position;
  3. relevant working experience in PRC-related private equity investments or PRC financial institutions;
  4. not having been subject to any judicial or regulatory penalties in the preceding five years; and
  5. a good personal credit record.

The registered capital requirement remains at US$2 million as a minimum.

Registration as a Foreign Invested Private Equity Fund

Applications are made to SAIC.

The Measures contain a new requirement prohibiting:

  1. investments in prohibited industries;
  2. investments in public securities or corporate bonds in the secondary market;
  3. investments in futures or other financial derivative transactions;
  4. investments in real estate other than for self use;
  5. investments of capital other than capital contributed by investors in the fund; or
  6. the provision of loans or security.

A qualified banking organisation in the PRC must be appointed to act as a custodian. It is not clear yet what banks will qualify for such purpose.

The new minimum fund size is expressed to be US$15 million whereas previously the minimum was expressed to be RMB100 million.

The new minimum capital contribution by each individual investor is expressed to be US$1 million whereas previously the minimum was expressed to be RMB5 million.


The Measures represent an encouraging step-forward in terms of relaxation of foreign exchange conversions, although some clarifications are still needed in practice. The Shanghai government has indicated that it obtained US$3 billion quota for the Measures. The Measures are expected to benefit foreign fund managers that manage assets for long term institutional investors and invest in new strategic industry, high-technology area and other encouraged industries, which may lead to another surge of RMB funds being set up by foreign fund managers.

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