2020.06.23 XIE, Qing (Natasha)、QIN, Tianyu、FANG,Hao
On June 12, 2020, the China Securities Regulatory Commission (CSRC) issued the Decision on Amending the Provisions for Administration of Equity Ownership in Securities Companies (Consultation Paper) (“Consultation Paper”). In line with the regulatory framework under the newly amended Securities Law of the People’s Republic of China (“New Securities Law”), which was officially implemented on March 1, 2020, and in reference to the regulatory practices regarding domestic and foreign financial institutions, the Consultation Paper proposes several amendments to the Provisions for Administration of Equity Ownership in Securities Companies (“Provisions”) issued by the CSRC on July 5, 2019 to further clarify the relevant requirements for investors of securities companies as well as the regulation of securities companies.
Pursuant to the drafting notes released by the CSRC (“Drafting Notes”), the proposed amendments involve the following aspects: (i) definition of major shareholder; (ii) qualification requirements for major shareholders; (iii) administrative approvals concerning equity ownership in securities companies; and (iv) other regulatory requirements, each of which will be further elaborated below.
According to the Drafting Notes, in reference to the regulatory practices regarding domestic and foreign financial institutions and in consideration of the increasingly diversified equity ownership structure in securities companies, the Consultation Paper proposes to amend the definition of major shareholder. The previous definition of major shareholder, namely, “a shareholder who holds 25% or more equity, or a shareholder who holds more than 5% and less than 25% equity, but is the largest shareholder in a securities company”, has been amended to “a shareholder holding more than 5% equity in a securities company”. By virtue of such amendment, there will be three rather than four classes of shareholders in a securities company, namely, (i) the controlling shareholder (i.e. a shareholder holding 50% or more equity in a securities company, or a shareholder who holds less than 50% equity in a securities company but whose voting rights are capable of exerting a significant impact on the resolutions by the shareholders’ meetings of a securities company); (ii) the major shareholder; and (iii) the shareholder with less than 5% equity.
Compared to the Provisions, Article 8 of the Consultation Paper moderately reduces the qualification requirements for a major shareholder of a securities company. Specifically, the Consultation Paper no longer requires a major shareholder to (i) have net assets of not less RMB 200 million (instead, a major shareholder only needs to have net assets of not less than RMB 50 million); (ii) be capable of making profits continuously; (iii) have experience in financial-related businesses that correlates with the business scope of the securities company; and (iv) formulate a reasonable and effective risk management plan for possible abnormality in business operation of the securities company incurred by any risk incident. By lowering the qualification requirements for the major shareholder of a securities company, the Consultation Paper encourages more investments in securities companies, thereby expediting the capitalization of securities companies.
Apart from the qualification requirements of major shareholders, Article 9 of the Consultation Paper further stipulates that the largest shareholder or controlling shareholder of a securities company needs to meet additional conditions, namely, (i) experience in financial-related businesses that correlate with the business scope of the securities company; (ii) an investment in the securities company is in line with its long-term strategies, and beneficial to the development of its core businesses; (iii) pragmatic and feasible plans and arrangements for improving the securities company’s corporate governance and facilitating the securities company’s business developments in a long term; (iv) an internal regulation mechanism in place to maintain the independent operation of the securities company and prevent any risk transmission and interest tunneling; (v) a reasonable and effective risk management plan for possible abnormality in business operation of the securities company incurred by any risk incident; and (vi) any other condition prescribed by the CSRC in accordance with the principle of prudent regulation. Notably, the aforesaid items (i) and (v) are the qualification requirements for major shareholders under the Provisions, which have been abolished by the Consultation Paper, while items (ii) to (iv) are the qualification requirements for controlling shareholders stipulated under Article 10 of the Provisions.
We understand that, compared with the Provisions, the Consultation Paper has generally reduced the qualification requirements for major shareholders. However, it has also increased the qualification requirements for the largest shareholder by aligning the qualification requirements for the largest shareholder with those for the controlling shareholder. Accordingly, if a major shareholder is also the largest shareholder of a securities company, upon the official implementation of the Consultation Paper, such shareholder has more qualification requirements to meet in addition to those stipulated under the Provisions. It follows that although the CSRC has generally relaxed the requirements for enterprises to invest in securities companies, it has not reduced the qualification requirements for core shareholders of a securities companies (i.e., the largest shareholder or the controlling shareholder).
The Consultation Paper has narrowed the scope of matters subject to an approval by the CSRC. In comparison to the Provisions, Article 6 of the Consultation Paper only requires securities companies which propose to change their major shareholders or de facto controllers to obtain an approval from the CSRC. Under the Consultation Paper, the matters required to be filed with the CSRC are (i) an increase in the registered capital resulting in a major change to the equity structure of a securities company, (ii) a decrease in the registered capital of a securities company, and (iii) a change of the shareholder or de facto controller holding 5% or more equity in a securities company, which were originally subject to an approval by the CSRC under the Provisions.
This amendment is consistent with the revision proposed by the New Securities Law. According to Article 122 of the New Securities Law, a securities company shall get an approval from the CSRC only when it changes its major shareholder or de facto controller. Moreover, the Circular on Cancellation or Adjustment of Some Administrative Approvals Regarding Securities Companies issued by the CSRC on March 3, 2020 has also made it clear that after March 1, 2020, the CSRC will no longer accept applications for administrative approvals that have already been cancelled under the New Securities Law.
In addition to the above-mentioned amendments, the Consultation Paper has further clarified some regulatory requirements according to the regulatory practices.
Article 20 of the Consultation Paper specifies for the first time that shareholders of securities companies shall not enter into a valuation adjustment mechanism (VAM) with other parties. VAMs include (i) agreements providing that a securities company shall repurchase equity held by a specific shareholder in the future, or a specific shareholder shall transfer or accept the equity of the securities company, provided that certain conditions are met, or (ii) any other similar equity transactions bearing the feature of VAM.
Article 6 of the Consultation Paper provides that the controlling shareholder or de facto controller of a securities company shall file with the CSRC upon holding 100% equity in the securities company. Specifically, the securities company shall file with the CSRC within five (5) working days after completing the relevant registration formalities with the company registration authority in regard to the aforesaid change of equity.
Article 15 of the Consultation Paper clarifies the exception to the requirement that a single non-financial enterprise shall not actually control more than 50% of the equity of a securities company, that is, the situation that a single non-financial enterprise actually controls more than 50% of the equity of a securities company for the purpose of handling the risk of the securities company is not subject to such requirement.