This article was written by Zhao Zhen (partner) and Han Linping (associate).
In the meeting between the Chinese and US Presidents in November 2017, China announced to "raise the upper limit for the percentage of direct or indirect investment by a single or multiple foreign investors in securities companies, fund management companies and futures companies to 51% and remove the restriction on investment proportion altogether three years after the implementation of the aforementioned measure".
Based on this pledge and a series of policies to expand the opening-up of the service industry in China, the China Securities Regulatory Commission ("CSRC") promulgated the Administrative Measures for Foreign Investments in Securities Companies (Exposure Draft) on 9 March 2018 for public comments and then on 28 April 2018, officially promulgated the Administrative Measures for Foreign Investments in Securities Companies (the "Measures").
Three foreign-invested securities companies responded quickly within only two weeks after the publication of the Measures. On 2 May 2018, UBS Securities Co. Limited ("UBS Securities") submitted an application for the change in de facto controller holding more than 5% shares to the CSRC. It is reported that UBS AU, as the foreign shareholder of UBS Securities, is currently holding 24.99% of the shares of UBS Securities and if its application is approved, UBS AU's shareholding may increase to 51% and hence become the controlling shareholder. On 8 May, Nomura Holdings and others submitted the application for the establishment of a foreign-invested securities company to the CSRC, wherein Nomura Holdings plans to hold 51% of the shares of the proposed securities company. On 10 May, J.P. Morgan Broking (Hong Kong) Limited and others submitted the application for the establishment of a foreign-invested securities company to the CSRC, wherein J.P. Morgan Broking (Hong Kong) Limited plans to hold 51% of the shares.
This article briefly analyses the main developments and amendments in the Measures as compared with previous rules and intends to serve as a reference for interested domestic and foreign investors.
Developments of Rules
1. The Rules for the Establishment of Foreign-shared Securities Companies
In June 2002, the CSRC promulgated the Rules for the Establishment of Foreign-shared Securities Companies (Order No.8 of CSRC) which was revised in December 2007 and October 2012 respectively (the "Rules" refers to the revised version of 2012 unless otherwise stated). The Rules cover two types of securities companies: (1) securities companies established and jointly funded by foreign and domestic shareholders; (2) securities companies converted from domestic securities companies by the way of shares transfer or shares issuance to foreign investors.
2. CEPA 10
In August 2013, the Chinese government and the governments of Hong Kong Special Administrative Region and Macau Special Administrative Region entered into Supplementary Agreements No. 10 to the Closer Economic Partnership Arrangement between Chinese Mainland and Hong Kong and to the Closer Economic Partnership Arrangement between Chinese Mainland and Macau (hereinafter collectively referred to as "CEPA 10"), which eased foreign access to the Chinese securities market. CEPA 10 implements a quota system where quotas are distributed in Shanghai, Guangdong, Shenzhen and several pilot zones for financial reform.
So far, four joint venture securities companies have been approved by the CSRC under CEPA 10:
| Name | Time of Obtaining Approval for Establishment |
Foreign Investment Proportion (at the time of approval) | |
| 1 | Shengang Securities Limited |
14 March, 2016 |
34.85% |
| 2 | Huajing Securities Limited |
20 April, 2016 |
49% |
| 3 | HSBC Qianhai Securities Limited |
19 June, 2017 |
51% |
| 4 | East Asia Qianhai Securities Limited |
19 June, 2017 |
49% |
3. The Administrative Measures for Foreign Investments in Securities Companies
On 28 April 2018, the Measures were officially promulgated after seeking public comments and the Rules were repealed at the same time. The Measures allows foreign investors to gain controlling shareholdings in joint venture securities companies, phases out business scope restrictions on joint venture securities companies, clarifies the policies over the legal status of a domestic securities company following changes in the de facto controller of a domestic shareholder, and improves the eligibility criteria for foreign shareholders. Since the publication of the Measures, eligible investors may submit application to the CSRC for changes in de facto controller of the company or for establishing joint venture securities companies in accordance with the Measures and other relevant administrative guidance.
Amendments to the Rules
According to the drafting notes of the CSRC, the Measures was amended and promulgated based on the Rules. As compared to the Rules, main amendments to the Measures are as follows:
| Contents | Main amendments | |
| 1 | Allows foreign investors to gain controlling shareholdings in joint venture securities companies |
The name of the regulation "The Rules for the Establishment of Foreign-shared Securities Companies" was changed to "The Administrative Measures for Foreign Investments in Securities Companies", which reflects that foreign investors are now able to gain controlling shareholdings in securities companies; The Rules provided that foreign shareholdings in joint venture securities companies shall not exceed 49%; and foreign shareholdings in securities companies established under CEPA 10 framework may reach 51%. Under the Measures, the upper limit for shareholdings by foreign shareholders in joint venture securities companies has been adjusted as which "shall comply with the country's arrangements on the opening-up of the securities industry" (and according to China's announcement at the China-US Presidents' Meeting, that is, not exceeding 51%); The Rules stipulated that among the domestic shareholders of a foreign-shared securities company, at least one of them shall be a domestic securities company; the Measures however, has not provided for any conditions or restrictions on the domestic shareholders of the joint venture securities companies, and the domestic shareholders are only required to meet the general qualification requirements stipulated in the PRC Company Law, Securities Law and other relevant regulations. |
| 2 | Phases out business scope restrictions on joint venture securities companies |
The Rules sets out clear restrictions on the business scope of joint venture securities companies; and only joint venture securities companies established under the CEPA 10 framework may gain full license; The Measures phases out the aforementioned restrictions on business scope, and allows newly established joint venture securities companies to apply for securities businesses in accordance with individual circumstances, though the preliminary scope of business shall be compatible with the securities business experience of the controlling shareholder or the largest shareholder. |
| 3 | Consolidates the percentage of foreign shareholdings in listed and non-listed securities companies |
The Rules provided that a single foreign investor shall not (directly or indirectly) hold more than 20% of shares in a listed domestic securities company and the total (direct or indirect) foreign shareholdings in a listed domestic securities company shall not exceed 25%. The percentage of total shareholdings by foreign investors in domestic securities companies has been adjusted under the Measures as which "shall comply with the country's arrangements on the opening-up of the securities industry" (and according to China's announcement at the China-US Presidents' Meeting, that is, not exceeding 51%); The Measures clarifies that, foreign investors who hold more than 5% of shares in a listed domestic securities company shall comply with relevant conditions specified in the Measures. |
| 4 | Improves the eligibility criteria for foreign shareholders |
The Rules provided that among the foreign shareholders of joint venture securities companies, at least one of them shall be an organisation with financial business operation qualifications; the Measures extends this requirement to all foreign shareholders, stipulating that all of them shall be financial institutions legally established in their countries or regions. The Measures has added the following qualification requirements for a foreign shareholder of joint venture securities companies: (1) has not been subject to investigations by relevant authorities for allegedly committing a material illegal act or violation; (2) has good international reputation and business performance; (3) its scale of business, revenue, and profits for the past three years rank forefront internationally, and its long-term creditworthiness remained high for the past three years. |
| 5 | Clarifies the policies over the legal status of a domestic securities company following a change in the de facto controller of its domestic shareholder |
The Rules did not clarify whether such changes may lead to the domestic securities company being subject to regulatory management on foreign-shared securities companies; the Measures sets out that, a domestic securities company will be converted to a foreign-invested securities company following a change in the de factor controller of the domestic shareholder. The Measures also clarifies, when the de facto controller of the domestic shareholder of a domestic securities company changes to a foreign investor, the foreign investor shall satisfy the criteria stipulated in the Measures and those that do not meet the criteria shall complete rectification in three months. |
Conclusion
After the publication of the Measures, the CSRC also revised relevant administrative guidance on establishing securities companies. Potential investors may apply for the establishment or changing of joint venture securities companies in accordance with relevant laws, regulations and administrative guidance.
It is worth noting that, the CSRC published the Provisions on the Administration of Equities of Securities Companies (Exposure Draft) on 30 March 2018 (the "Provisions"), which divides shareholders of securities companies into four categories: (1) the controlling shareholder (which holds more than 50% of shares or holds less than 50% of shares but has voting rights which may materially affect the decisions of the shareholders' meeting); (2) the main shareholder (which holds more than 25% of shares or is the largest shareholder holding more than 5% of shares); (3) the shareholder which holds more than 5% of shares and (4) the shareholder which holds less than 5% of shares. The Provisions also clarifies the regulatory requirements for shareholders of difference categories from aspects including net assets, sustained profitability and business profits, and stipultates that the Provisions shall be applicable to foreign-invested securities companies. Although the Provisions has not entered into force yet, it may be used as an important frame of reference for investors intending to apply for establishing joint venture securities companies.
《办法》明确，内资证券公司股东的实际控制人变更为境外投资者，应符合《办法》规定境外投资者应符合的条件，不符合者应在3个月内完成规范整改。
《办法》明确，内资证券公司股东的实际控制人变更为境外投资者，应符合《办法》规定境外投资者应符合的条件，不符合者应在3个月内完成规范整改。
