The China Securities Regulatory Commission (CSRC) issued the Measures for the Administration of Foreign-Funded Securities Companies (“MAFFSC”, 外商投资证券公司管理办法) on 28 April 2018. At the same time, Rules for the Formation of Securities Companies with Foreign Shareholders (外商参股证券公司设立规则, the former governing rule) was abolished.
In this article, we summarize the main changes and the key issues for overseas investors in a securities company in China.
The first and the most important change is the removal of the shareholding ratio cap of foreign investment in securities companies. Previously it was limited to 49%. Though the new regulation did not specify a new percentage, it is generally believed that it will be 51%. The background of this assumption is that, China listed securities companies as one of the main industries open to foreign investment in August 2017; following that, Xi Jinping promised to Donald Trump in their meeting November last year that “in securities companies, together with several other industries, foreign investment can own up to 51% of shareholding. This limit will be removed 3 years later.” Within a month time after the issuance of the new regulation, three foreign-funded securities companies applied for increase their shareholding percentages. Including UBS Securities LLC, Nomura Holding, Inc., and J.P. Morgan Broking (Hong Kong) Limited.
The second change is opening up the business scope of the foreign-fund securities company. It only requires that “the company’s initial business scope shall be commensurate with the experience of its controlling shareholder or largest shareholder in operating securities business (Article 5, MAFFSC).” Previously the foreign-funded securities companies are limited to operating business within the listed items in the former rule. Which include underwriting of shares (including RMB average shares and foreign shares) and bonds (including bonds issued by the government and companies); brokerage of foreign shares; Brokerage and proprietary dealing of bonds (including bonds issued by the government and companies); and other businesses approved by the CSRC.
All overseas investors are required to be a financial entity and are qualified to carry securities business in its home country. They also need to satisfy the following requirements:
- the country in which it is located has sound securities laws and regulatory systems, and such country’s securities regulator has entered into a Memorandum of Understanding with the CSRC concerning cooperation in the regulation of the securities sector and maintains an effective regulatory cooperation relationship with the CSRC. UK is one of the 24 countries who have signed the MOU.
- it is legally qualified to carry on securities business in the country in which it is located; all of its financial indicators for the past three years conform to the requirements of the laws and the requirements of the securities regulator of the country in which it is located；
- has operated continuously for 5 years or longer; hasn’t been serious punished by authorities in the past 3 years, not being investigated by the judicial authorities or regulatory authorities due to any serious violation;
- it has sound internal control regulations；
- in the past 3 years, it had kept a good reputation and achieved good operating results; its business scale, income, profit have been listed at advanced level internationally; and its long-term credit has kept at high level.
Previously a domestic shareholder of a securities company with foreign equity participation shall satisfy the CSRC’s qualification conditions for securities company shareholders. This requirement has been predigest to a shareholder of a China securities company (Article 124, Securities Law: the main shareholders have continuous profitability, good reputation, no major violations of laws and regulations in the past three years, and the net assets are not less than RMB 200 million).
There are 3 types of foreign-funded security companies:
- Securities companies jointly funded and formed by foreign and domestic shareholders according to the law;
- Securities companies resulting from modification of domestic-funded securities companies according to the law due to the lawful transfer of equities of domestic-funded securities companies to foreign investors or foreign investors’ lawful subscription for such equities; and
- Securities companies resulting from modification of domestic-funded securities companies according to the law due to the modification of actual controllers of shareholders of domestic-funded securities companies into foreign investors.