Traditionally, it has been difficult for offshore fund manager or offshore venture capital to conduct fundraising in China, due to China's foreign exchange control. The Qualified Domestic Institutional Investor ("QDII") program, which was established in 2006, is commonly considered being restricted to the needs of retail investors. However, various local governments started to relax restrictions on RMB foreign investment by launching pilot alternatives in the following years. In 2013, Shanghai launched the Qualified Domestic Limited Partner ("QDLP") program, followed by other cities like Tianjin, Chongqing, Qingdao and Shenzhen, notably the Qualified Domestic Investment Enterprises ("QDIE") program launched by Shenzhen.
Both QDLP and QDIE require the formation of an onshore fund in one of the pilot cities, in the form of a company, a limited partnership, or a contractual fund. The fund will have an onshore fund manager and/or general partner in the form of a foreign-invested partnership enterprise or a wholly foreign-owned enterprise. Such onshore fund will then become an investor in one or more offshore funds affiliated with the offshore fund manager. Additionally, both QDLP and QDIE must engage a qualified domestic commercial bank as its custodian to safekeep its onshore assets, and also engage a qualified administrator to be responsible for the back-office administration.
There are several differences between QDLP and QDIE, including but not limited to the following:
1. Permissible Investment Scope – Shenzhen QDIE program is
permitted to invested more broadly while Shanghai QDLP program is
restricted to offshore public market only;
2. Eligible Participants - Under Shenzhen QDIE program, the eligible participants can be either foreign-invested or pure domestically-funded companies, while under Shanghai QDLP program, primarily the qualified foreign-funded managers/companies are eligible to participate; and
3. Capital requirements on the onshore manager - The minimum registered capital for foreign-invested manager is US$2 million and RMB 10 million for domestically-funded companies under Shenzhen QDIE program, while it is US$2 million under Shanghai QDLP program.
To be approved as an onshore feeder, a joint committee or working group composed of various local regulators is involved in the approval process. Once approved, each onshore feeder will be officially granted a foreign currency quota and may apply for an additional quota as needed. The onshore feeder will then accept subscription in RMB from Chinese investors, which can be converted into US dollars for investing into one or more offshore funds without additional approvals.
It should be noted that the applicable QDLP/QDIE rules containing disclosure requirements and ongoing reporting requirements, together with the relevant rules concerning private funds, such as the requirements on private placement, investor suitability and ongoing filing/reporting, would be applied to the onshore fund, the fund manager and the service providers.
It is anticipated that more liberated programs, including upgraded QDII, will be issued to facilitate offshore investment by Chinese individuals.
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