2018.03.15 XIE, Qing (Natasha)、LU, Bing、QIN, Tianyu
On March 9, 2018, the China Securities Regulatory Commission (“CSRC”) issued the Administrative Measures for Foreign-invested Securities Companies (Consultation Paper) (“Measures”), indicating that China’s commitment to opening up the securities industry, which it made at the summit of the Chinese and US heads of state in November 2017, is in the process of being turned into defined rules of implementation. According to China’s commitment, the foreign ownership upper limit in a securities company, whether held directly or indirectly, and on a single entity or aggregated basis, will be increased to 51%. Moreover, three years after the above measures have been implemented, any remaining limit on foreign ownership will be removed. The proposed amendments to the existing rules included in the Measures are primarily intended to honor such commitment. Below we have summarized the key amendments that may be of concern to foreign investors.
One of the changes introduced by the Measures is that the upper limit on foreign shareholding in a foreign-invested securities company is increased from 49% to “being subject to China’s commitments relating to the opening up of the securities industry (currently 51%)”. For a newly established Sino-foreign joint venture securities company (“Securities JV”), the direct and indirect foreign shareholding in such a Securities JV shall in principle be not less than 25%, while a domestically-owned securities company that is changing into a foreign-invested securities company will not be subject to such limit.
In addition to the above modifications, the corresponding Drafting Statement of the Measures released by the CSRC on the same day explains that the Measures remove the existing restrictions on the domestic shareholder and the scope of business of a foreign-invested securities company, after taking into consideration the “divergences and contradictions between Chinese and foreign shareholders relating to the Securities JV’s strategic positioning, business model and operational management, which may arise from the dual restrictions on the foreign shareholding and the scope of business of Securities JVs.” Hence, the Measures remove the restriction to require a Securities JV’s domestic shareholder to be a securities firm: in other words, a foreign investor may choose to incorporate a Securities JV with a non-financial institution. The Measures also remove the limits on the scope of business of a Securities JV, but add such a new requirement that “the initial scope of business of a Securities JV shall match the securities business experience of its controlling shareholder or the largest shareholder.”
Article 125 of the PRC Securities Law sets forth the six types of business that may be undertaken by a securities company, namely (i) securities brokerage, (ii) securities investment advisory, (iii) financial advisory services relating to the activities of securities trading or securities investment, (iv) underwriting and sponsoring the issuance of securities, (v) proprietary securities trading, and (vi) securities asset management. According to the current regulatory provisions, a securities company when being established may in principle apply to operate four types of business, and may apply to expand the scope of business one year thereafter, with the limitation of adding two types of business for each application. Under the Measures, the business scope of a foreign-invested securities company is subject to one requirement more than that of a domestically-owned securities company, namely that “the initial scope of business of a Securities JV shall match the securities business operation experience of its controlling shareholder or the largest shareholder.” We suggest that when newly establishing a securities company, foreign investors should consider their specific situation prior to determining the strategy they intend to take for the application of scope of business.
The relevant requirements proposed by the Measures for foreign shareholders fall within the scope of “prudential requirement for financial business.” Specifically, the Measures change the requirement that “there must be at least one financial institution” among all foreign shareholders to that “all foreign shareholders must be financial institutions.” At the same time, the Measures change the requirement on foreign shareholders from “having a good reputation and business performance” to that of “having a good international reputation and business performance, having the scale of business, revenue and profits which for the past three years shall have been ranked at the top international level, and long-term credit shall have remained at a high level for the past three years”, and requires foreign shareholders to provide relevant documentation, demonstrating the regulatory institution’s prudent attitude to foreign investor’s access to the securities industry. The requirements for foreign shareholders stipulated in this paragraph apply to both newly established foreign-invested securities company and those converted by acquisition.
The Measures increase the upper limit on the shareholding of all foreign investors in a listed securities company from 25% to “being subject to China’s commitments relating to the opening up of the securities industry (currently 51%)”, and increase the upper limit on the shareholding of an individual foreign investor in a listed securities company from 20% to 30%.
In order to address a new situation faced in regulatory practice, whereby “some de facto controllers of domestically-owned securities companies have changed their identities (from Chinese to foreign nationality), thereby causing the relevant securities companies to be indirectly owned by foreign investors”, the Measures deal with this type of situation as an incorporation of a foreign-invested securities company, and so specify requirements on the relevant documents to be submitted for approval on such change, and require such type of foreign investors to meet the relevant conditions for foreign shareholders under the Measures within a prescribed time period. Given the recently issued provisions provided in the Interim Measures for Administration of Equity in Commercial Banks and the Measures for Administration of Equity in Insurance Companies that require conducting “penetrating regulation” on the administration of equities in commercial banks or insurance companies, it appears that the principle of “penetrating regulation”, as one of the fundamental regulatory principles, will be adopted in the equity administration of all types of financial institutions.
The cut-off time for soliciting comments for the Measures is April 8, 2018. We anticipate that the formal measures will be enacted very soon thereafter, and that the Catalogue for the Guidance of Foreign Investment Industries will also be amended accordingly. Foreign magnates intending to set up a new securities company or increase a shareholding in an existing Securities JV are advised to make appropriate plans and be well prepared as early as possible for these anticipated changes.
1. The Catalogue for the Guidance of Foreign Investment Industries (Revised in 2017) lists the securities company as a restricted foreign investment industry, and requires the Chinese party/ies to hold a majority of shares in a foreign-invested securities company, of which the scope of businesses upon establishment shall be limited to underwriting and sponsorship of ordinary RMB-denominated stocks, foreign stocks, treasury bonds and corporate bonds, brokerage of foreign stocks, and brokerage and proprietary trading of government bonds and corporate bonds, which may be expanded upon approval two years after the company’s establishment, if it satisfies the relevant conditions.