On 27 July, the China Securities Regulatory Commission (CSRC) formally issued and implemented the Regulations on Issues Relevant to the Implementation of the Measures for the Administration of Investment in Domestic Securities by Qualified Foreign Institutional Investors, which supercedes the Notice on Issues Relevant to the Implementation of the Measures for the Administration of Investment in Domestic Securities by Qualified Foreign Institutional Investors implemented on 1 September 2006. The notice, which was in force for close to six years, thus became invalid.
The formal issuance of the regulations signifies that with the improvement in the international balance of payments, the CSRC will speed up its examination and approval of qualified foreign institutional investors (QFIIs). According to its website, as at July this year the CSRC had approved a total of 173 QFIIs. It can be anticipated that an increasing number of foreign institutional investors will join the ranks applying for QFII licences.
Through an analysis of the regulations and the notice, we have found that the CSRC is showing a new development trend in the administration of the investment by QFIIs in domestic securities. For example, in order to speed up the approval of QFII qualifications, the CSRC has simplified the previous application procedure. An application: (1) no longer requires submission of the applicant’s articles of association or a draft of the custody agreement to be executed with the custodian, instead requiring the submission of the power of attorney issued to the custodian; and (2) no longer requires the provision of audited financial statements for the most recent three years, instead requiring the submission of the audited financial statements for the past year.
Lower entry threshold
The regulations greatly reduce the size of the assets and the period of operation required of applicants for QFII status. For asset management firms, insurance companies and other institutional investors – including pension funds, charity foundations, endowment funds, trust companies, government investment management companies, etc. – the requirement in respect of the time that they have been engaged in asset management business, or established, has been reduced from “at least five years” to “at least two years”, and the requirement in respect of the securities assets under their management in the most recent fiscal year has been reduced from “not less than US$5 billion” to “not less than US$500 million”.
For securities companies, the requirement in respect of the time engaged in securities business has been reduced from “at least 30 years” to “at least five years”, while “paid-in capital of not less than US$1 billion” has been reduced to “net assets of not less than US$500 million”, and the requirement in respect of the securities assets under management in the most recent fiscal year has been reduced from “not less than US$10 billion” to “not less than US$5 billion”.
For commercial banks, the requirement that their total assets ranks them near the top in the world has been eliminated and replaced by “has been engaging in banking business for at least 10 years and has Tier 1 capital of not less than US$300 million”. A commercial bank is no longer required to have not less than US$10 billion in securities assets under their management, instead needing “securities assets of not less than US$5 billion under its management in the most recent fiscal year”.
Flexible account opening
Under the notice, an applicant was required to entrust its custodian to apply to Securities Depository and Clearing Corporation Limited (SDCCL) to open securities accounts, and such accounts were required to correspond on a one-to-one basis with special renminbi accounts approved by the State Administration of Foreign Exchange. QFIIs could only open one fund account corresponding to one securities account with each of the Shanghai and Shenzhen stock exchanges. Although the regulations similarly require an applicant to entrust its custodian to apply to SDCCL to open securities accounts, they no longer make it mandatory for such accounts to correspond on a one-to-one basis with special renminbi accounts, thereby making it possible for a QFII to open fund accounts with different securities houses to carry on trading.
The regulations also simplify the fund categories for securities accounts, dividing them only into securities accounts opened for a QFII’s own funds and securities accounts opened for customers’ funds. The regulations eliminate the nominal holder accounts specified in the notice. Correspondingly, the provision of the notice specifying that “A Qualified Investor, as a nominal holder, may, based on the shareholdings of the overseas investors under its name, cast part of the votes or divide its votes” has also been deleted.
The regulations have also added a provision that permits a QFII to engage a domestic fund company to provide it with specific customer asset management services, and require such domestic fund company to open the corresponding account. The scope of investment is required to comply with relevant QFII regulations.
Pursuant to the notice, QFIIs could invest in stocks, bonds, warrants and securities investment funds listed and traded on a stock exchange, as well as other financial instruments permitted by the CSRC. The regulations also allow QFIIs to invest in fixed-return products traded on the interbank bond market and stock index futures.
The regulations also ease the restriction on the percentage of A shares of listed companies that QFIIs can hold, easing the total holding of the A shares of a listed company by all foreign investors from the previous “not exceeding 20% of the total shares of said listed company” to “not exceeding 30% of the total shares of said listed company”.
An applicant is required under the regulations to first submit its application materials electronically via the CSRC’s website before submitting the application documents to the CSRC. The regulations formally provide, in the form of ministerial-level rules and regulations, that when a change occurs in the custodian, legal representative or controlling shareholder of a QFII, an adjustment is made to its registered capital, it is involved in a material legal action or other material event, is subjected to major penalties abroad or another circumstance specified by the CSRC or State Administration of Foreign Exchange arises, it is required to promptly carry out recordal of the development electronically via the CSRC’s website.
Kevin Xu is a partner and Samuel Gao is an associate at Martin Hu & Partners (MHP Law Firm)
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