China: PRC Regulations On Securities Companies With Foreign Investment Newly Revised

Last Updated: 6 May 2008
Article by Edith Chen

1. Introduction

The China Securities Regulatory Commission (CSRC) has revised the Regulations on Formation of Securities Companies with Foreign Investment (adopted in 2002, hereafter referred to as "Regulations of 2002"), and the revised regulations ("Revised Regulations") has become effective from 1 January 2008. The Revised Regulations have eased foreign investment in securities companies to certain extent and contain the following major revisions:

  • The Revised Regulations cease to require that only foreign securities companies qualified in the country or region or its incorporation may invest into a PRC securities company. Now foreign financial institutions or other foreign institutional investors are permitted as well to invest in a PRC securities company, while among all foreign investors of a PRC securities company at least one shall be a foreign financial institution. The requirement for 10-year consecutive operation on foreign investors has been reduced to 5-year. The restriction still remains that the entire equity or share holding ratios of foreign investors in a PRC securities company shall not exceed 1/3.
  • The Revised Regulations no longer restrict a PRC securities company with foreign investment to be a limited liability company. Consequently foreign investors can now also invest to PRC securities companies limited by shares including listed securities companies.
  • The Revised Regulations contain new provisions on approaches, qualifications, procedures and percentage restriction for foreign investors to acquire shares of PRC listed securities companies. A foreign investor may acquire shares of PRC listed securities companies either at a stock exchange or through strategic investment. A foreign investor is only subject to the qualification review by the CSRC if it holds 5% or more shares of a PRC listed securities company.

(A PRC securities company with foreign investment will be hereafter referred to as "Securities Company with Foreign Investment").

This article is targeted to provide an overview of the legal regulations currently applicable under the PRC laws on foreign investment in PRC securities companies, in particular with regard to the new amendments as made by the Revised Regulations easing the foreign investment as well as the relevant restrictions as still existing.

II. Legal forms and approaches for formation of Securities Companies with Foreign Investment

The restriction as contained in the Regulations of 2002 which provides that a Securities Company with Foreign Investment shall be a limited liability company has been deleted from the Revised Regulations. Instead the Revised Regulations generally provide that the legal form of a Securities Company with Foreign Investment shall be in accordance with the relevant provisions in the PRC Company Law, Securities Law and other relevant laws and regulations.

The deletion of the above-mentioned restriction is to enable foreign investors to invest into securities companies limited by shares including listed securities companies, which is a major step made by the CSRC in respect of enlarging the investment opportunities for foreign investor(s) on the PRC securities market.

A PRC securities company with a legal form of a wholly-foreign owned enterprise ("WFOE") was and is still not allowed under the PRC laws. However, a Securities Company with Foreign Investment may have a legal form as a Sino-foreign joint venture company.

Under the PRC laws, there are two approaches for formation of a Securities Company with Foreign Investment, i.e. formation

  • through establishment of a securities company jointly by foreign investor(s) and domestic investor(s) ("New Establishment"); or
  • through acquisition of equity or shares of a domestic-invested securities company by foreign investor(s) ("Share Deal").

Therefore, a Securities Company with Foreign Investment can be formed either through a New Establishment or a Share Deal.

III. Business scope and new amendments in this respect

The Regulations of 2002 provided that a Securities Company with Foreign Investment may engage in the following business activities:

  • Underwriting of shares (including RMB ordinary shares1 and foreign stock) and bonds (including government bonds and corporate bonds)
  • Brokerage of foreign stock;
  • Brokerage and self-dealing of bonds (including government bonds and corporate bonds); and
  • Other business as approved by the CSRC.

In addition to the above business activities, the Revised Regulations now also allow a Securities Company with Foreign Investment to engage in sponsoring for the issuance of shares (including Renminbi ordinary shares and foreign stock) and bonds (including government bonds and corporate bonds).

Based on such legal provisions, generally a Securities Company with Foreign Investment was and is still not permitted to engage in, among others, brokerage of RMB ordinary shares and self-dealing of shares (including RMB ordinary shares and foreign stock), which constitutes the main legal restriction with regard to the business activities as permitted to a Securities Company with Foreign Investment.

Although the Revised Regulations keep the above-mentioned restriction on the business scope for a Securities Company with Foreign Investment, the Revised Regulations also provide for an exception that a listed securities company may keep its originally approved business scope unchanged even if part of its shares is held by foreign investor(s). Such exception does enable foreign investor(s), though investment in a listed securities company, to indirectly share "profit" derived from the brokerage of RMB ordinary shares as well as self-dealing of shares on the PRC securities market.

IV. Requirements for formation of a Securities Company with Foreign Investment

The Revised Regulations provide for the following preconditions for formation of a Securities Company with Foreign Investment:

1. Requirement on registered capital

Minimum registered capital

A Securities Company with Foreign Investment shall first meet the requirement for minimum registered capital as set forth in the PRC Securities Law.

According to Article 127 of the PRC Securities Law, a PRC securities company only engaging in securities-related broking and/or consulting business shall have a registered capital no less than RMB fifty million (RMB 50,000,000.00). A PRC securities company shall have a registered capital no less than RMB one hundred million (RMB 100,000,000.00) if it engages in one of the following business activities and shall have a registered capital no less than RMB five hundred million (RMB 500, 000,000.00) if it engages in two or more of the following business activities:

  • Underwriting and sponsoring of securities;
  • Self-dealing of securities;
  • Management of securities assets;
  • Other securities-related business.

Contribution of Registered Capital

While domestic investors to a Securities Company with Foreign Investment may make their capital contributions in cash or in kind, foreign investors are legally required to make their capital contributions to a Securities Company with Foreign Investment in freely convertible currency.

2. Requirement on qualification of foreign investors

The following qualification requirements are provided under Article 7 of the Revised Regulations on foreign investors to a Securities Company with Foreign Investment:

  • the country or region, where the foreign investor is incorporated, has a sound legal and regulatory system on securities, and has executed a memorandum of understanding with the CSRC or an organization recognized by the CSRC with regard to cooperation in securities regulation and maintained with the same an effective relationship in respect of regulatory cooperation;
  • the foreign investor has been lawfully established in the country or region of its incorporation. Among all the foreign investor(s) to a Securities Company with Foreign Investment, at least one foreign investor shall be an institution with lawful qualification to engage in financial business. A foreign investor is not permitted to transfer its equity or shares in a Securities Company with Foreign Investment within three (3) years after its acquisition of the same;
  • the foreign investor has conducted business operation continuously for at least five (5) years and has not been imposed with major penalty by the regulatory authority, administrative authority or judicial bodies of the country or region of its incorporation during the preceding three (3) years;
  • the foreign investor has reached the financial targets as provided for by the laws and regulations or required by the regulatory authority of the country or region of its incorporation;
  • the foreign investor has sound internal control systems;
  • the foreign investor has a good reputation and good business results; and
  • other requirements for prudence as provided for by the CSRC.

As also mentioned above, compared with the Regulations of 2002 the Revised Regulations loosen to certain extent the requirements on the qualification of foreign investors to a Securities Company with Foreign Investment,

  • by ceasing to require that only foreign securities companies qualified in the country or region of its incorporation may invest in a PRC securities company; and
  • by reducing the requirement for 10-year consecutive business operation on the foreign investor to 5-year.

However, compared with the Regulations of 2002 the Revised Regulations also provides for an additional restriction on foreign investor(s) to a Securities Company with Foreign Investment, i.e. that the foreign investor is not permitted to transfer its equity in a Securities Company with Foreign Investment within three (3) years after its acquisition of the same. To our understanding such additional restriction in the Revised Rules applies generally to foreign investment in PRC securities companies including limited liability securities companies and securities companies limited by shares. While before the effectiveness of the Revised Regulations, it has been already legally required by the Regulations on Foreign Strategic Investment to Listed Companies that shares acquired by a foreign investor in a listed PRC company through strategic investment are not permitted to be transferred within three (3) years after the acquisition of the same (please also refer to below VI. 2).

In case of investment in a listed securities company, a foreign investor is only subject to the qualification review by the CSRC with regard to the compliance with the requirements on qualification as provided for in Article 7 of the Revised Regulations, if it directly and indirectly holds 5% or more shares of the listed securities company, whether through dealing at a stock exchange or through strategic investment.

3. Requirement on qualification of domestic investors

Article 8 of the Revised Regulations keeps the legal requirement that among the domestic shareholders of a Securities Company with Foreign Investment at least one domestic shareholder shall be a domestic-invested securities company. However, in case of conversion of a domestic-invested securities company to a Securities Company with Foreign Investment through a Share Deal, such restriction does not apply.

4. Restriction on shareholding ratios

The following legal restrictions on shareholding ratios as contained in the Regulations of 2002 are still kept in the Revised Regulations:

  • The aggregate ratios of the equity, shares or interest as held, both directly and indirectly, by foreign investor(s) in a Securities Company with Foreign Investment shall not exceed one-third (1/3).

Under this general restriction, more strict restrictions are legally provided with regard to ratios of the shares held by foreign investor(s) in a listed PRC securities company. Please refer in this respect to below VI. 3.

  • Among the domestic-invested securities companies being shareholders to a Securities Company with Foreign Investment, at least one domestic-invested securities company shall hold no less than one-third (1/3) equity or shares of the Securities Company with Foreign Investment. In case of a Securities Company with Foreign Investment converted from a domestic-invested securities company through a Share Deal, at least one domestic shareholder shall hold no less than one-third (1/3) equity or shares of such Securities Company with Foreign Investment.

However, in case of a listed securities company, under the precondition that the controlling shareholder is a domestic shareholder, the requirement that at least one domestic shareholder shall hold no less than one-third (1/3) shares of such Securities Company with Foreign Investment does not apply.

5. Other requirements

Pursuant to the Revised Regulations, a Securities Company with Foreign Investment shall have not less than thirty (30) employees2 with relevant qualifications to engage in securities business in accordance with the provisions of the CSRC, and shall have the necessary accounting, legal and computer professionals.

In addition to the above, the CSRC provides for further requirements on a Securities Company with Foreign Investment, e.g. sound internal control and risk control system, appropriate facilities etc., which we would refrain from addressing in detail in this article.

V. Procedures for formation of a Securities Company with Foreign Investment and required documents

1. Approval by the CSRC

The formation of a Securities Company with Foreign Investment whether through a New Establishment or a Share Deal is subject to an approval by the CSRC.

In case of a New Establishment of a Securities Company with Foreign Investment, the following documents shall be submitted to the CSRC for approval application:

  • Application form jointly signed by all (foreign and domestic) shareholders;
  • Drafts of shareholders' agreement or joint venture contact and articles association for the establishment of the Securities Company with Foreign Investment;
  • Document evidencing that key senior management personnel proposed to be appointed fulfils the conditions for relevant positions;
  • Copies of the business license(s) or registration certificate(s) and certificate(s) of qualification for securities business of the shareholder(s);
  • Audited financial statements of all (foreign and domestic) shareholders for the preceding three years;
  • Explanation letter issued by the relevant regulatory authority of the country or region of the incorporation of the foreign shareholder(s) or by an overseas organization recognized by the CSRC on whether the foreign shareholder(s) fulfils the requirements specified in (2), (3) and (4) of Article 7 of the Revised Regulations (Please refer in this respect to above IV. 2);
  • Letter of legal opinion issued by a PRC law firm; and
  • Other document as may be required by the CSRC.

In case of formation of a Securities Company with Foreign Investment through a Share Deal, the following documents shall be submitted for approval application:

  • Application form signed by the legal representative of the securities company;
  • Resolution of the shareholders' meeting of the securities company to convert it to a Securities Company with Foreign Investment;
  • Draft amendments to the articles of association of the securities company;
  • Share transfer agreement or the capital contribution agreement (share subscription agreement);
  • List of the persons appointed by the foreign investor to the securities company, their résumés, pertinent proofs of their qualifications to engage in securities business and proofs of their qualifications for relevant positions;
  • Copies of the business license(s) or registration certificate(s) and certificate(s) of qualification for securities business of the foreign shareholder(s);
  • Audited financial statements of foreign shareholders for the preceding three years;
  • Explanation letter issued by the relevant regulatory authority of the country or region of the incorporation of the foreign shareholder(s) or by an overseas organization recognized by the CSRC on whether the foreign shareholder(s) fulfils the requirements specified in (2), (3) and (4) of Article 7 of the Revised Regulations (Please refer in this respect to above IV. 2);
  • Plan for clearance of the businesses legally not permitted to a Securities Company with Foreign Investment;
  • Letter of legal opinion issued by a PRC law firm; and
  • Other document as may be required by the CSRC

 

2. Registration with the Administration of Industry and Commerce

In case of a New Establishment of a Securities Company with Foreign Investment, upon the approval by the CSRC, the shareholders shall make full contribution to the registered capital of the company, appoint directors of the board, supervisor(s) and high management personnel and apply to the Administration of Industry and Commerce (i.e. the Company Registration Authority) for registration of the company for obtaining the business licensee, all within six (6) months after the CSRC approval.

In case of a Share Deal, upon the approval by the CSRC, the equity or share transfer or capital increase procedures shall be handled, the business not permitted to a Securities Company with Foreign Investment shall be cleared and application shall be submitted to the Administration of Industry and Commerce for registration and obtaining a revised business license, all within six (6) months after the CSRC approval.

Upon the issuance of the business license by the Administration of Industry and Commerce, a Securities Company with Foreign Investment is officially formed.

3. Application for Permit for Operation of Securities Business

Within fifteen (15) working days upon the issuance of the business license, a Securities Company with Foreign Investment shall apply to the CSRC for a Permit for Operation of Securities Business by submitting certain legally-required documents.

The CSRC will review these application documents in respect of compliance of the Securities Company with Foreign Investment with the relevant legally-provided requirements. In case of non-compliance, the CSRC may reject to issue the Permit for Operation of Securities Business. Without a Permit for Operation of Securities Business, a Securities Company with Foreign Investment is not allowed to engage in any securities-related business.

With the approval at the first step as well as the review procedures related to a Permit for Operation of Securities Business, a two-stage control by the CSRC is achieved with regard to formation of a Securities Company with Foreign Investment.

VI. Foreign investment in listed PRC securities companies

1. Advantages for foreign investment in listed PRC securities companies

Compared with foreign investment in PRC securities companies with other legal status, foreign investment in listed PRC securities companies may enjoy the advantages summarized as follows:

  • As mentioned in above III, the business scope of a Securities Company with Foreign Investment is restricted to certain extent, however, with an exception that a listed securities company may keep its approved business scope unchanged, even if part of its shares is held by foreign investor(s).
  • As mentioned in above IV, foreign investor(s) of a Securities Company with Foreign Investment shall fulfill certain requirements on qualifications as provided for in Article 7 of the Revised Regulations. However, in case of investment in a listed securities company, a foreign investor is only subject to a qualification review by the CSRC with regard to compliance with Article 7 of the Revised Regulations, in case 5% or more of the shares of the listed securities company is held by the foreign investor. (If the foreign investor fails to pass the qualification review by CSRC, it will be ordered to decrease its shareholding ratio in the PRC listed securities company to below 5% within the provided period.)

2. Approaches

There are two approaches for foreign investors to invest into listed PRC securities companies: i.e. (1) purchasing shares of a PRC listed securities company at the PRC stock exchanges; (2) acquiring shares of a PRC listed securities company through strategic investment.

With regard to the first approach (purchasing shares at stock exchange), it needs to be mentioned that a normal foreign investor is not allowed to deal directly at the PRC stock exchanges, but needs to entrust a Qualified Foreign Intuitional Investor (so-called "QFII"), which is approved by the CSRC and the PRC State Administration of Foreign Exchange, to purchase stock of listed PRC companies including listed PRC securities companies.

Under the second approach (strategic investment), a foreign investor may acquire, subject to an approval by the CSRC, shares of a listed securities company by means of e.g. a share transfer agreement or a private placement of additionally issued shares of the listed securities company. Under the current applicable PRC laws, a strategic foreign investor to a PRC listed company is subject to certain requirements on qualification. E.g. one of the major requirements is that a strategic foreign investor to a PRC listed company or the mother company of the strategic foreign investor shall have actual total assets of no less than USD one hundred million (USD 100,000,000.00) overseas or shall have under its management actual total assets overseas of no less than USD five hundred million (USD 500,000,000.00).

Shares acquired by a foreign investor through strategic investment are not permitted to be transferred within three (3) years after the acquisition of the same. However, to our understanding such restriction does not apply to shares acquired by a foreign investor through QFII at a stock exchange.

3. Restriction on ratios of shares held by foreign investor(a) in a listed PRC securities company

According to Article 25 of the Revised Regulations,

  • the ratio of the shares directly and indirectly held by one foreign investor in a listed PRC securities company shall not exceed 20%; and
  • the aggregate ratio of the shares directly and indirectly held by all foreign investors in one listed PRC securities company shall not exceed 25%.

Such provision in the Revised Regulations is a general restriction on shareholding ratios of foreign investor(s) to a listed PRC securities company, which apply to ratios of shares acquired by foreign investor(s) both through the first approach under above VI. 2 (purchasing shares at stock exchange) and through the second approach under above VI. 2 (strategic investment).

A PRC regulation on QFII investment also provides

  • the ratio of the shares held through QFII by one foreign investor in a listed PRC company shall not exceed 10%;
  • the aggregate ratio of the shares held through QFII by all foreign investors in one listed PRC company shall not exceed 20%

In respect of foreign investment to listed PRC securities companies, this restriction as contained in the regulation on QFII investment applies only to the ratio of the shares acquired by foreign investor(s) through the first approach under above VI. 2 (purchasing shares at stock exchange).

 

Footnotes

1 i.e. shares issued by listed companies incorporated in PRC Mainland and traded on the mainland stock markets.

2 Under its 2002 version, fifty (50) employees with relevant qualification to engage in securities business were required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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