23 December 2015

Analysis of the Conditions and Restrictions for Securities Companies with Foreign Shareholders

This article was written by Zhao Zhen (partner) and Han Linping (assistant solicitor)

On November 2nd, 2015, Shenzhen Qianhai Financial Holdings Limited (“QHFH”) announced it had agreed with Hong Kong and Shanghai Banking Corporation Limited to form an HSBC controlled joint venture securities company in Shenzhen Qianhai. If it gets regulatory approval, the joint venture company will operate a full license securities business in the PRC, and this will mark a breakthrough as the first foreign-controlled securities company engaging in this business in mainland China.

On December 7th, 2015, QHFH also agreed with Bank of East Asia Ltd to form a full license joint venture securities company in Shenzhen Qianhai.

In addition to the establishment of joint venture securities companies, in November, 2015, Credit Suisse announced that Credit Suisse Founder Securities Limited (“CSFS”) had obtained a License for a Securities Business to perform securities brokerage services in Shenzhen Qianhai. CSFS is the first joint venture securities company allowed to enlarge the scope of its securities brokerage business since the domestic securities industry restarted the process of opening up in December, 2007.

These trends show that securities companies with foreign shareholders have received significant attention during the continuing process of financial reform and innovation. In this article, we will briefly analyse the conditions and restrictions for the formation of securities companies with foreign shareholders.

Background and New Regulations

The Rules for the Establishment of Foreign-shared Securities Companies (Order No.8 of CSRC) were promulgated by the China Securities Regulatory Commission (“CSRC”) in 2002, and revised in 2007 and 2012 (“the Rules” and references are to the revised Rules of 2012 unless otherwise stated). The Rules cover two types of company: (1) Securities companies established and jointly funded by foreign and domestic shareholders; (2) Securities companies that have changed from being domestic-funded by the issue of shares to foreign investors.

In August 2013, Supplementary Agreements were signed to the Mainland [1] and Hong Kong Closer Economic Partnership Arrangement and to the Mainland and Macau Closer Economic Partnership Arrangement (hereinafter collectively referred to as “CEPA10”). CEPA10 relaxed the access of foreign funds to the Chinese securities market by: 1) allowing both Hong Kong and Macau funded financial institutions that meet conditions for establishing securities companies with foreign shareholders to set up full license joint venture securities companies with domestic-funded companies in Shanghai, Guangdong Province and Shenzhen in accordance with relevant domestic provisions; 2) allowing both Hong Kong and Macau funded financial institutions which meet the conditions for establishing securities companies with foreign shareholders to establish full license joint venture securities companies with domestic-funded companies in several mainland pilot zones where financial reform experiments are permitted. (“Reform Pilot Zones”).

In August 2015, CSRC issued the Implementing Relevant Policies of CEPA10 on Further Expanding the Opening Up of Securities Institutions. This stipulates the requirements for Hong Kong-funded and Macau-funded financial institutions to establish securities companies with foreign shareholders. The announcement provides operational guidelines for the establishment of securities companies with foreign shareholders under the CEPA10 framework.

Over recent years, Free Trade Zones in Shanghai, Guangdong Province, Tianjin and Fujian Province have relaxed the access conditions for foreign investment in securities companies.

Conditions and Restrictions

The main conditions for the formation of securities companies with foreign shareholders are:

1. Restrictions on the Shareholdings of Foreign and Domestic Shareholders

The restrictions on the shareholding of foreign and domestic shareholders include:

(1) The shareholding of foreigners in a domestic securities company must not exceed 49% cumulatively (including direct shareholding and indirect control).

(2) In a domestic funded securities company with foreign shareholders there must be at least one domestic shareholder with a holding of not less than 49%.

(3) The proportion of the shares of a listed domestic-funded securities company held (including direct holding and indirect control) by a single foreign investor must not exceed 20%; the proportion of the shares of a listed domestic-funded securities companies that are held (including direct holding and indirect control) by all foreign investors must not exceed 25%.

(4) “Foreign investors may not hold a controlling share in a securities company without approval. No individual foreign investor shall hold or control more than a 5% stake in a company which is a shareholder of a securities company.

When the 2002 revision of the Rules was promulgated, the upper limit of the shareholding of foreign shareholders and the lower limit of the shareholding of domestic shareholders in (1) and (2) above were both 1/3. These thresholds were retained in the 2007 revision of the Rules except they made provision for the purchasing of shares through the secondary market or strategic investment as stated in the following point (1). Then in the 2012 revision of the Rules, the restrictions on the shareholding were both adjusted to 49%.

However, there are exceptions to the above shareholding restrictions:

(1) If foreign investors legally hold the shares in a listed domestic-funded securities company through securities trading on a stock exchange or hold shares in a listed domestic-funded securities company with the approval of the CSRC by establishing a strategic partnership with the listed domestic-funded securities company, then the requirement that one domestic shareholder must hold at least a 49% shareholding does not apply provided that the listed company’s controlling shareholder is a domestic shareholder. 

(2) The shareholding of Hong Kong or Macau shareholders in a joint venture securities company which is established in Shanghai, Guangdong Province or Shenzhen under CEPA10 may be up to 50%. 

(3) A joint venture securities company established in the Reform Pilot Zones under CEPA10 is free from the restriction that one domestic shareholder must hold a minimum of 49% of the shares. 

(4) Under the Framework Plan for China (Fujian) Pilot Free Trade Zone, the Fujian Free Trade Zone is exploring whether to allow Taiwan-funded financial institutions to: establish joint venture securities companies, raise the maximum shareholding of Taiwan shareholders to 51%, and lift the requirement that the shareholding of one domestic shareholder must not be lower than 49%.

2. Restrictions on the Qualification Requirements for the Shareholders

Apart from the qualification requirements for foreign and domestic shareholders in securities companies with foreign shareholders, the Rules stipulate that among the domestic shareholders of a securities company with foreign shareholders, at least one shall be a domestic-funded securities company.

The exceptions to this restriction are as follows:

(1) The foreign shareholder invested securities companies that were originally domestic-funded securities companies are free from this restrictive regulation. 

(2) The domestic shareholders of the joint venture securities companies established in Shanghai, Guangdong Province, Shenzhen or Reform Pilot Zones under CEPA10 are not limited to securities companies. 

(3) According to the Notice for Further Promoting the Financial Opening Up and Innovation of China (Shanghai) Pilot Free Trade Zone and Accelerating the Construction Scheme for a Shanghai International Finance Centre, the domestic shareholders of joint venture securities companies established in the Shanghai Free Trade Zone are not required to be securities companies. 

(4) The Framework Plan for China (Fujian) Pilot Free Trade Zone considers permitting Taiwan-funded financial institutions to establish joint venture securities companies with Mainland shareholders who are not limited to securities companies.

3. Restrictions on Business Scope

Under the Rules, the business scope of securities companies with foreign shareholders are limited to: (1) Underwriting and recommendation of stocks (including RMB common stocks and foreign capital stocks) and bonds (including government bonds and corporate bonds); (2) Brokerage of foreign capital stocks; (3) Brokerage and proprietary trading of bonds (including government bonds and corporate bonds); and (4) Other businesses approved by the CSRC. If the foreign investors hold shares in a listed domestic-funded securities company through securities trading on a stock exchange or with the approval of the CSRC by a strategic partnership with a listed domestic-funded securities company, then the approved business scope of the listed domestic-funded securities company will remain unchanged.

According to current policies and regulations, the 3 methods for securities companies with foreign shareholders to obtain licenses are :

(1) Hong Kong-funded and Macau-funded financial institutions that meet the requirements of CEPA10 and the conditions for establishing securities companies with foreign shareholders may establish a full license joint venture securities company with domestic-funded companies in Shanghai, Guangdong Province and Shenzhen in accordance with relevant domestic provisions

(2) Hong Kong-funded and Macau-funded financial institutions that meet the requirements of CEPA10 and the conditions for establishing securities companies with foreign shareholders may establish full license joint venture securities companies with domestic-funded companies in Reform Pilot Zones.

(3) According to the Framework Plan for China (Fujian) Pilot Free Trade Zone, Taiwan-funded financial institutions that meet the conditions for establishing securities companies with foreign shareholders may be allowed to establish two full license joint venture securities companies with domestic-funded companies in the Fujian Free Trade Zone.

In addition, the Shanghai Free Trade Zone has also included the expansion of the business scope of joint venture securities companies in its construction scheme. However, it has so far not issued any relevant detailed rules on the plan.

4. Restrictions on the Number of Investment and Securities Companies ( A single controlling entity may have only one Funds Holding Management Company)

According to the Notice of China Securities Regulatory Commission on Revising the Working Guidelines No.10 for the Examination and Approval of Administrative Licensing for Securities Companies, An organization or multiple organizations run by the same actual controllers are entitled to up to two equity fund management companies, of which only one can be a Funds Holding Management Company.

5. Other Matters Needing Attention

Securities companies with foreign shareholders should also note the following:

(1) When establishing securities companies with foreign shareholders, domestic shareholders may invest with cash or tangible goods necessary for the business operation, while the foreign shareholders must invest freely exchangeable currency.

(2) The businesses of new established securities companies as approved shall not be more than four types, except as otherwise required by the CSRC.

(3) The following changes to securities companies must be approved by the securities regulatory authority of the State Council.

  • Alteration to business scope;
  • Changes to shareholdings exceeding 5% or to control;
  • A significant increase or reduction in registered capital or change in equity structure;
  • An alteration of any important article of its constitution
  • Any merger or spilt of the company
  • The new appointment of directors, supervisors, senior managers and responsible persons of branch offices.

Note

1 This article excludes the Hong Kong Special Administrative Region, the Macau Special Administrative Region and the Taiwan Region.

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