Written by Elaine Lo (Partner)
The China Banking Regulatory Commission ("CBRC") promulgated the Administrative Measures for making Investment through Share Participation by Overseas Financial Institutions in Chinese Financial Institutions (the "Measures") on 8 December 2003. Although People's Bank of China and CBRC have, over the last two years, already permitted foreign banks and financial institutions to subscribe for shares in Chinese commercial banks, the approval was given on a case-by-case basis. The Measures have now enacted into law this discretionary policy of permitting foreign banks and financial institutions to take equity stakes in Chinese commercial banks, and increase the transparency and predictability of the internal guidelines that regulate foreign participation in the banking sector of China.
A. Scope of Application
The Measures expressly provide that all subscriptions for and purchases of shares by overseas financial institutions in Chinese-owned financial institutions must be approved by CBRC.
"Overseas financial institutions" is defined in the Measures as including international financial institutions (such as the World Bank and its affiliated entities) and financial institutions established by foreign governments, as well as non-government owned financial institutions incorporated in a place outside Mainland China.
"Chinese-owned financial institutions" is defined in the Measures as those commercial banks, urban credit co-operative unions, agricultural credit co-operative unions, trust and investment corporations, financial leasing corporations and finance companies owned by conglomerates which are incorporated inside Mainland China.
B. Pre-Requisite Conditions To Be Met By Overseas Financial Institutions
An overseas financial institution must fulfill the following requirements before it is eligible to apply to CBRC for approval to make a share subscription or purchase in a Chinese-owned financial institution:
1. Total Assets Requirement
(a) Overseas financial institutions that wish to purchase an equity stake in a Chinese commercial bank must have total assets of not less than US$10 billion at the end of the year preceding the year of making the application.
(b) Overseas financial institutions that wish to buy an equity stake in a Chinese credit co-operative union or other Chinese non-bank financial institution must have at least US$1 billion worth of total assets at the end of the year preceding the year of making the application.
2. The long-term credit rating awarded by an international credit rating agency, recognized by CBRC, to the overseas financial institution should be good.
3.The overseas financial institution should be profitable for the 2 consecutive fiscal years immediately preceding the year of making the application.
4. The capital adequacy ratio of an overseas commercial bank must not be lower than 8%, and the amount of total capital assets of an overseas non-bank financial institution must not be less than 10% of its total risk weighted assets.
5. A sound internal control system has been set up by the overseas financial institution.
6. The supervision and administration systems of the place of incorporation or registration of the overseas financial institution are complete.
7. The economy of the country or place where the overseas financial institution is located should be good.
8. If the overseas financial institution in question is a non-international and non-government owned financial institution, CBRC will also require (i) the credit rating reports of that overseas financial institution for the last 2 years, issued by an international credit rating agency recognised by CBRC, and (ii) the approval document issued by the regulatory authority of the financial services industry in the country or place where that overseas financial institution is incorporated or registered, approving the investment to be made by that overseas financial institution.
9. Other requirements as may be stipulated by CBRC.
C. Limitation on Foreign Ownership Interests
1. The maximum shareholding that any one single overseas financial institution can have in a Chinese-owned financial institution is limited to 20% of the total issued shared capital of that Chinese-owned financial institution.
2. If the aggregate of all the shares held by overseas financial institutions in a non-listed Chinese-owned financial institution is equal to or exceeds 25% of that Chinese-owned financial institution's total issued share capital, then that Chinese-owned financial institution shall be supervised and administered by CBRC as though it is a foreign-owned financial institution operating in China.
3. If the Chinese financial institution with overseas shareholders is a listed company, then it will still be supervised and administered by CBRC as a Chinese-owned financial institution even though the aggregate of all the shares held by overseas financial institutions in that listed Chinese financial institution amounts to or exceeds 25% of its total issued shared capital.
D. Method And Time Allowed For Payment Of Purchase Price
1. An overseas financial institution is required to pay for its share subscription or purchase in a Chinese-owned financial institution with cash.
2. The Measures require the share subscription or purchase price to be remitted to a bank account of the Chinese-owned financial institution within 60 working days after the granting of approval for the share subscription or purchase by CBRC.
The Measures are not applicable to share subscription or purchase in auto-financing companies, as such investment is governed by the Administrative Rules for Automobile Financing Companies promulgated by CBRC on 3 October 2003.
The Measures will become effective on 31 December 2003.
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