On June 1st of 2002, the China Security Regulatory Commission of the People's Republic of China ("CSRC") promulgated a piece of new legislation, the Rules on the Incorporation of Fund Management Companies with Foreign Participation (hereinafter the "Legislation"), which sets out the incorporation terms and procedures of Sino-foreign fund management companies. The Legislation takes effect from July 1st of 2002. The following is a summary of the Legislation.
1. Sino-foreign fund management companies include 1) those existing fund management companies of which part of the equity shares are acquired by foreign shareholders, and 2) those fund management companies which are newly incorporated by Chinese and foreign investors.
2. The CSRC is the approval body for Sino-foreign fund management companies and the regulatory body supervising the day-to-day activities of such fund management companies.
3. Sino-foreign fund management companies must meet the usual requirements for choice of name, amount of registered capital, capital structure and the responsibilities of each department of the fund management company as set out in the PRC Company Law and the PRC Law on the Administration of Securities Investments. The fund management company should be established in the form of a limited liability company.
4. A foreign shareholder in a Sino-foreign fund management company should meet the following requirements:
- It has been duly incorporated and legally existing and for at least three years has not been punished by the security regulatory body or any judicial body in its home country;
- The home country of the foreign shareholder should have a comprehensive regulatory system for securities and a comprehensive legal system. The regulatory body of that country must have already signed a memorandum of understanding with the CSRC and there must exist an effective co-operative relationship between that regulatory body and the CSRC;
- The foreign shareholder must pay in capital of at least RMB 300 million in the form of freely exchangeable foreign currency;
- Other prudential requirements may be set out by CSRC.
5. Chinese shareholders of a Sino-foreign fund management company must meet the requirements set out by the CSRC for shareholders of a fund management company.
6. The foreign shareholders in the Sino-foreign fund management company may not hold more than 33% of the company (including shares directly held or indirectly held). Within three years of China's access to the WTO, the percentage will increase to 49%. Foreign shareholders must invest in the form of freely convertible foreign currency.
7. The Chairman, General Manager, or deputy General Manager of a Sino-foreign fund management company should meet the qualifications and conditions stipulated by the CSRC for high ranking management personnel.
8. To incorporate a new Sino-foreign fund management company, the Chinese and foreign applicants should submit application documents to the CSRC in the content and format prescribed by the CSRC.
9. The application form and other documentation submitted by the foreign and domestic applicants to the CSRC should be in Chinese. If any documents or materials issued by the foreign shareholder or the foreign regulatory body are not in Chinese, there should be Chinese translation attached.
10. If a Sino-foreign fund management company is newly incorporated by the foreign and Chinese investors, it should go through two stages: 1) the incorporation stage, and 2) the business commencement stage.
11. Sixty days from its receipt of the applicants' incorporation application, the CSRC should review the documents and decide whether to allow the application of the applicants and notify the applicants of its decision in writing. If it decides not to approve establishment, it should give reasons in writing.
12. If a Sino-foreign fund management company that has been incorporated but its incorporation stage has not expired but its foreign shareholder has undergone significant changes or has seriously violated regulations of its home country and has been punished by the regulatory body or has been under supervision of the regulatory body of its home country for misbehavior or financial difficulty, such foreign shareholder should ask promptly to convene a sponsors' meeting and explain the situation. If after such changes or punishment or supervision, the foreign shareholder does not meet the requirements set out in the PRC regulations, the sponsors must put forward a proposal at the meeting for further action. The proposal should be submitted by the sponsors to the CSRC.
13. Upon the completion of the incorporation of the Sino-foreign fund management company, the application for the commencement of business should be submitted to the CSRC. Within 30 days from its acceptance of the applicants' business commencement application, the CSRC should review the documents and decide whether to allow the application of the applicants and notify the applicants of its decision in writing. If it decides not to approve business commencement, it should give reasons in writing.
14. If a foreign investor is to acquire or purchase shares of an existing fund management company, the fund management company should submit documents to the CSRC to apply for the approval from the CSRC. Within 60 days from its acceptance of the fund management company's restructuring application, the CSRC should review the documents and decide whether to allow the application of the applicants and notify the applicants of its decision in writing. If it decides not to give the approval, it should give the reasons in writing. The CSRC will review and whether to give its approval to the application of the fund management company to increase new shareholders, or to change the shareholder who holds the biggest shares or who appoints the biggest number of directors of the fund management company in accordance with the approval procedures applicable to the incorporation of new Sino-foreign fund management company.
15. If the governing body in the home country of a foreign shareholder requires that the foreign shareholder should register its foreign investment with such governing body, after the CSRC approves the foreign participation in the Sino-foreign fund management company, the foreign shareholder file its participation in the Sino-foreign fund management company for records with the governing body, a copy of such registration materials should be submitted to the CSRC.
16. Within 30 days from the approval from the CSRC, the shareholders of a Sino-foreign fund management company should register with the AIC for incorporation of the new company or change in the existing fund management.
17. These regulations also apply to those shareholders from Taiwan, Hong Kong and Macao who are to set up joint venture fund management companies with mainland Chinese shareholders.
18. As to any issue relating to the incorporation, termination, change, the business activities and supervision and management or Sino-foreign fund management companies that is not covered by these regulations, other regulations of the CSRC shall apply.
For further information on this please contact Luke Filei on luke.filei@cms-cmck.com or +86 10 6590 0389 in Beijing or +86 21 6289 6363 in Shanghai.
