On July 27, 2012, the China Securities Regulatory Commission ("CSRC") issued the Provisions on Issues in relation to the Implementation of the "Administrative Measures for Domestic Securities Investment by Qualified Foreign Institutional Investors" ("New QFII Provisions"). The New QFII Provisions, which came into effect on the same day, replaced the Notice on Issues Related to the Implementation of the "Administrative Measures for Domestic Securities Investment by Qualified Foreign Institutional Investors" issued on June 24, 2006 ("Old QFII Measures"). Prior to the issuance of the New QFII Provisions, a draft of the New QFII Provisions was issued by the CSRC on June 20, 2012 ("Consultation Draft") for public comment.
Under PRC law, a foreign investor must obtain a special license to become a qualified foreign institutional investor ("QFII") to invest in China's securities markets. By relaxing the restrictions and thresholds imposed on QFIIs in the Old QFII Measures, the New QFII Provisions aim to attract more foreign investment funds to China's securities market. We summarize below the major changes in the New QFII Provisions.
I. RELAXING THE QUALIFICATION THRESHOLDS
The New QFII Provisions shorten the required time of existing ("TOE") or time of operation ("TOP") of the QFII applicants and significantly lower the amount of securities assets under management of the QFII applicant in the most recent fiscal year ("AUM"), the net assets or other capital requirements of the QFII applicant. Below is a summary of the differences regarding TOE, TOP and AUM between the New QFII Provisions and the Old QFII Measures:
II. STREAMLINING THE APPLICATION PROCESS
According to the New QFII Provisions, QFII applicants are now required to file their applications electronically via CSRC's website as well as submit a hard copy of all application documents to the CSRC. Rather than filing with the CSRC directly for any significant events (such as replacement of a QFII's custodian, and replacement of a QFII's legal representative, etc.), a QFII will now be required to file such events electronically via CSRC's website.
The requirements for application documents have also been simplified. The articles of association of the applicant and the draft custodian agreement are no longer required. Furthermore, the audited financial statements for the latest year are required rather than that for the past three years.
III. FLEXIBLE ACCOUNT MANAGEMENT
In the Old QFII Measures, each QFII was permitted to entrust three securities companies in China to trade securities at the Shanghai Stock Exchange and Shenzhen Stock Exchange, respectively. However, in practice, a QFII could only entrust one securities company in each Stock Exchange because (i) each QFII has only one special Renminbi account approved by the State Administration of Foreign Exchange ("SAFE"); (ii) the Old QFIII Measures require that the securities account must correspond with the special Renminbi account on a one-to-one basis; and (iii) China Securities Depository and Clearing Corporation Limited (the "Clearing Company"), where a QFII's securities account would be open, only allowing a QFII to open one securities account for every special Renminbi account. Therefore, a QFII can only open one securities account in the Clearing Company Shanghai Branch and Shenzhen Branch respectively, and thus can entrust only one securities company in each Stock Exchange to manage such securities account. Under the New QFII Provisions, the requirement of one-to-one correspondence is removed so that a QFII will be able to open multiple securities accounts with up to three securities companies in each Stock Exchange to manage the securities accounts.
The New QFII Provisions now require a QFII to open separate accounts for different clients. The account can be named as "QFII + Client Name". Where a QFII applies to open an account for a long-term fund, such as a publicly offered fund, insurance fund, pension fund, charity fund, donation fund and government investment fund, such an account can be named as "QFII + Fund (or Insurance Fund, etc.)". Furthermore, domestic fund management companies are now permitted to render specific client assets management services, such as investment consulting and fund management.
IV. LOOSENING INVESTMENT RESTRICTIONS
Under the Old QFII Measures, a QFII could invest in stocks, bonds and warrants traded on stock exchanges and securities investment funds. The permitted investment scope provided in the Consultation Draft was expanded to include stock-index futures and bonds traded on the interbank bond market. The New QFII Provisions expanded this to cover not just "bonds" but "fixed income products" traded on the interbank bond market.
Furthermore, the maximum aggregate amount of shareholding of all foreign investors in a single A-shares listed company is raised from 20% to 30%, with the maximum aggregate amount of shareholding of a single foreign investor in a single listed company unchanged at 10%.
V. OUTSTANDING ISSUES
The New Provisions are silent as to certain questions we have been asked by potential investors. One example is whether there is a penalty if a QFII's actual investment is different from its investment plan submitted to the CSRC and the SAFE or whether the CSRC and the SAFE will examine whether the investment of a QFII is adhering to the plan. During our informal inquiries with the CSRC and the SAFE officials, the officials indicated that during the application phase, a QFII applicant may change its investment plan by submitting a new version before the original plan is officially approved, but once it is approved (as part of the QFII application), a QFII is expected to adhere to such plan and inconsistencies with the investment plan may adversely impact the QFII's future attempts to increase its investment quota. Nonetheless, a QFII can reserve some flexibility when crafting its investment plan. For instance, a QFII may list in its plan all the securities a QFII is permitted to invest under PRC law, but it does not necessarily have to invest into each of them. A QFII's custodian bank is required to submit monthly reports to the regulators which reports cover, among others, the QFII's assets, investments and trades. As such, a QFII's investment activities and whether it is adhering to its investment plan are constantly reviewed by the regulators.
Furthermore, the New QFII Provisions did not address the question as to whether there are any legal requirements requiring the QFII to make investments within a certain time limit after obtaining the SAFE approved quota. According to our informal inquiries with the regulators, we were told by the officials that there is no time limit regarding when the QFII must invest. However, in practice, failure to invest will likely hurt any attempt by the QFII to increase its investment quota. Pursuant to Article 6 of the Provisions on Foreign Exchange Administration on Investment in Domestic Securities by Qualified Foreign Institutional Investors, a description regarding its investments in China with respect to its existing investment quota is required in an application for a quota increase. Thus there is no regulatory penalty for not investing remitted funds, but such inaction will make it difficult to increase the investment quota until the remitted funds are actually used. Also, PRC law does not stipulate a validity period for an approved quota. As long as the quota has not been revoked by the regulators due to non-compliance (e.g., if, within six months of the approval of the quota, the actual amount the QFII remits into China is less than US$20 million, the QFII's quota will be revoked), it remains valid.
VI. CONCLUSION
During the first six months of this year, 37 foreign investors were granted QFII licenses by the CSRC, compared with only seven for the same period last year. The New QFII Provisions represent China's efforts to further open up its capital markets. However, how much the QFII program will grow as a result of the New QFII Provisions still depends on the pace of the regulatory approval process by the CSRC and the issuance of favorable rules by other related authorities, such as the SAFE.
Footnote
1 Such as pension funds, charitable foundations, donation funds, trust companies, government investment management companies, etc.
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