Home / Publications / JunHe Legal Updates / details of junhe law review

New Regulation on the Administration of Equity Ownership in Securities Companies —— Implications for Foreign Investors

2019.07.19 XIE, Qing (Natasha)、QIN, Tianyu

On July 5, 2019, the China Securities Regulatory Commission (CSRC) promulgated the Provisions for the Administration of Equity Ownership in Securities Companies (“Provisions”). As was the case for the earlier consultation paper issued in March, 2018 (“Consultation Paper”), the Provisions continues to emphasize the need for prudential regulation, but additionally provides for the implementation of “see-through regulation” and “classification management” in the equity ownership in securities companies. The Provisions retains the main content of the Consultation Paper, while introducing substantial adjustments to the requirements for classification management. 

In a Q&A session about the Provisions, the CSRC announced its plan to resume issuing new securities business licenses to domestic investors, given that it has committed to offer the same to foreign investors. It is of some significance that the mindset of the regulator is to provide equal market access to domestic and foreign investors, while increasing the overall supervision of equity ownership of securities companies. 

We briefly summarize below the key points that may be of particular interest to foreign investors. 

I. New Classification System and Conversion between Categories

The Provisions classifies securities companies into two categories according to their risk level and their business complexity: 1) Securities companies that engage in regular securities activities (“traditional securities companies”), such as securities brokerage, securities investment consulting, financial consulting, securities underwriting and sponsorship and proprietary trading; 2) Securities companies that engage in activities involving significant use of leveraging and presenting the possibility of risk across multiple businesses (“complex securities companies”). This latter category applies to securities companies that are involved in innovative and complicated activities, such as stock option market-making, OTC derivative, and share pledge-type repo. 

A traditional securities company may apply to undertake innovative and complex activities and to convert into a complex securities company, provided that its controlling shareholders and major shareholders satisfy the qualification requirements under the Provisions. Likewise, a complex securities company is also permitted to convert to a traditional securities company. 

Traditional and complex securities companies differ greatly from each other in their business activities. Given that a traditional securities company may not be permitted to undertake innovative and complicated securities activity, being licensed as a traditional securities company is likely to be perceived as a less attractive option for investors than being licensed as a complex securities company.

II.Differing Requirements for Controlling Shareholders by Category

Consistent with the Consultation Paper, the Provisions divides securities company shareholders into four main classes:

 (i) Any shareholder holding less than 5% equity,

 (ii) Any shareholder holding 5% or more equity, 

(iii) Any major shareholder holding 25% or more equity, or anyone holding more than 5% and less than 25%, but who is the largest shareholder, and (iv) The controlling shareholder.

In contrast to the controlling shareholder of a traditional securities company, the controlling shareholder of a complex securities company shall meet the following additional conditions:

 (i) It has had positive net profit for the past 3 years;

 (ii) It has had long-term, high-level creditworthiness, and its scale of business, revenues and profits rank it at the forefront of its industry; 

(iii) It has total assets of no less than RMB 50 billion, and net assets of no less than RMB 20 billion; and 

(iv) It has a strong and outstanding core business, which has produced positive net profits over the past 5 years. 

The major shareholders of a complex securities company are only required to meet conditions (i) and (ii). The CSRC will allow a five-year grace period to any securities companies whose controlling or major shareholders fail to satisfy the above conditions. 

The impact of these requirements for controlling shareholders and major shareholders is likely to fall most heavily upon small and medium-sized securities companies. For this reason, we would anticipate that small and medium-sized securities companies may choose either to forego their involvement in innovative and complex activities, or alternatively, in order to maintain their status as a complex securities company, they may be open to new shareholders with strong capital strength.

III. Non-Financial Institutions as Controlling Shareholders

The Provisions specifically requires that the equity actually controlled by a single non-financial institutional shareholder in a securities company shall not exceed 50% of total equity in principle. This is less stringent than in the Consultation Paper, which had proposed a limit of just one-third of total equity.

IV. Mandatory Requirements Concerning Equity Transfers of More Than 5%

Pursuant to the Provisions, if an investor acquires equity of a securities company through a stock exchange and reaches a threshold of 5%, it shall make timely disclosure in accordance with relevant laws and regulations, and apply to the CSRC for approval. The investor shall not further increase its shareholding in the securities company until it has received approval. If the application is rejected by the CSRC, the investor shall return to the previous shareholding status within 50 trading days1 as of the date of the rejection.

For the equity transfer of a securities company, the obligations of the Provisions are greater than those of the Consultation Paper for both the securities company and equity transferor. Specifically, the Provisions requires that: (i) The securities company shall formulate a work plan and a set of criteria for the selection of shareholders; (ii) The securities company and the equity transferor shall fulfill their duty of disclosure by informing the potential transferee about the criteria for shareholders, the mandatory procedures, the securities company’s business performance and potential risks, etc.; (iii) The securities company and the transferor shall conduct a due diligence check on the potential transferee; and (iv) The securities company shall reach an ex-ante agreement with the relevant parties on the accountability system and the measures that will be taken to pursue the liability of the responsible person in the event of any potential violations or breaches during the process of change of registered capital or equity ownership. 

The Provisions further provides that if an investor should sell any securities company equity through a stock exchange or the NEEQ, and the equity change does not require regulatory approval or filing, the investor shall be exempted from the four abovementioned obligations. For example, if a foreign investor proposes to sell equity in a securities company through QFII/RQFII and/or Stock Connect and the sale does not result in a more than 5% equity change, then it can be exempted from the abovementioned obligations. However, if the sale will result in a change of equity of more than 5%, then it will be required to fulfill the four abovementioned obligations. 

V. Restrictions on Equity Pledges

The Provisions emphasizes the importance of there being stability in the equity holding of securities companies, and requires that shareholders of a securities company shall not pledge their equities during a lock-up period, and that, even after a lock-up period, a shareholder shall pledge no more than 50% of the equity it holds in a securities company.

VI. Prohibiting the Transfer of Right of Control over Equity 

Compared with the Consultation Paper, the Provisions imposes more stringent requirements on the prohibited behaviors concerning the change of equity ownership of a securities company.  Sub-paragraphs 3 and 4 of Article 56 of the Consultation Paper indicated that the Articles of Association of a securities company shall stipulate that, without due approval from the CSRC, shareholders and their designated directors shall not be allowed to exercise their voting rights if they are involved in any of the following circumstances: 

(i) Entrusting others to hold or manage their equity of a securities company, or 

(ii) Being entrusted to hold or manage the equity of a securities company by accepting the entrustment for the voting right or the right to dividends so as to indirectly control the equity of the securities company, or in any other disguised manner. By contrast, Sub-paragraph 6, Article 30 of the Provisions goes further, and rather than just restricting the shareholders’ exercise of voting rights, expressly lists such conduct as being prohibited behavior for shareholders and actual controllers of a securities company. In the Provisions, shareholders and actual controllers of a securities company shall not entrust others or be entrusted to hold or manage the equity of a securities company, or to accept or transfer the right of control over the equity in any disguised manner without due approval from the CSRC. 

Interpreted literally, “obtaining the controlling right to certain equity of a securities company in a disguised form through transferring the right to proceeds of such equity or other similar means” can be understood to be the same as “transferring the right of control over the equity without due approval from the CSRC.” 

The application of the Provisions raises the question as to whether a Total Return Swap arrangement, in which the equity of a securities company is used as the underlying asset and the beneficial interest of the equity of a securities company is indirectly transferred, would be regarded as “transferring the right of control over the equity in a disguised manner.” 

Our analysis of this issue is that, regardless of the proportion of the equity they hold, shareholders of a securities company shall be prohibited from transferring the right of management, the right of disposal and the right of control over the equity of a securities company. 

It appears that the issue of whether a business arrangement which involves an indirect transfer of the beneficial interests of equity in a securities company is considered to constitute a transfer of the right of management, the right of disposal or the right of control over the equity will be determined on a case-by-case basis in accordance with the principle of “substance over form.” 


For large foreign financial institutions intending to set up wholly-owned or majority-owned securities companies, we believe there is little doubt about whether they should apply to be a complex securities company. Meanwhile, the potential restructuring of small or medium-sized securities companies through the implementation of the Provisions is likely to result in M&A opportunities for foreign investors. 

We suggest foreign investors should continue to pay close attention to the changes proposed by the new regulation. For any foreign investors intending to directly or indirectly acquire or sell shares in a securities company on the public market, we would counsel them to make sure they have full awareness of the additional compliance obligations stipulated in the Provisions and their likely implications, and to strive to understand the underlying spirit and principles of the regulations.

1. The 50 days does not include trading suspension. Moreover, if the equity has been held for less than 6 months at the time of rejection, the investor shall make restoration only upon the expiry of a 6-month holding period.

JunHe is the only Chinese law firm to be admitted as a member of Lex Mundi and Multilaw, two international networks of independent law firms. JunHe and selected top law firms in major European and Asian jurisdictions are “best friends.” Through these connections, we provide high quality legal services to clients doing business throughout the world.