Foreign Investors Allowed Wider Access to Securities Joint Ventures

(a) Scope of qualified foreign shareholders of a securities company with foreign equity participation (Foreign Shareholders) The revised Rules provide that Foreign Shareholders shall “have been lawfully established in their residing country or region and at least one of them is qualified to engage in financial business in their residing country or region”, widening the scope of qualified Foreign Shareholders by allowing for foreign investors with qualifications to engage in financial business in their residing countries, whereas under the previous rules, only foreign investors who were engaged in the securities industry in their residing countries were allowed to have equity participation in Chinese domestic securities companies. In addition, the minimum required continuous business period of qualified Foreign Shareholders has been lowered from 10 years to 5 years.

(b) Choices of organizational forms for the incorporation of joint venture securities companies The revised Rules remove the limitation of the organizational form of a joint venture securities company, which is provided in Clause 1, Article 4 of the previous Rules, namely, that a “securities company with foreign equity participation shall be incorporated as a limited liability company”. Under the revised Rules, a joint venture securities company can be incorporated not only as a limited liability company but also can be incorporated as other organizational forms, although they must still be in compliance with the laws of the PRC, including the Company Law and the Securities Law, and relevant rules of the China Securities Regulatory Commission (CSRC).

(c) Acquisition of shares of listed Chineseinvested securities companies by a foreign investor A new article has been added in the revised Rules, which expressly provides for the first time that a foreign investor is allowed to “acquire shares of a listed Chinese-invested securities company through securities transactions on a stock exchange, or establish a strategic cooperative relationship with a listed Chinese-invested securities company and, with the approval of the CSRC”. However, there are restrictions on the percentage of their shareholdings: “the percentage of the shares of a listed Chinese-invested securities company held directly or controlled indirectly by a single foreign investor may not exceed 20%; and the percentage of the shares of a listed Chinese-invested securities company held directly or controlled indirectly by all foreign investors may not exceed 25%.”

In addition, the revised Rules reduce the required number of employees in securities companies with foreign equity participation who have obtained qualifications to engage in securities business, in accordance with the provisions of the CSRC, from 50 to 30. This further relaxes the conditions of establishing a joint venture securities company.

Some Key Restrictions Remain

Although the revised Rules have lifted some restrictions on foreign investor access into the Chinese securities industry, some of the main restrictions remain to ensure Chinese control of the joint venture securities companies and protect the domestic securities companies. For example, the restriction on the percentage of shares or interests held by foreign investors remains almost unchanged: “the percentage of the shares or the interest held by foreign investors in the securities company with foreign equity participation may not exceed one-third (including shares/ interests held directly or controlled indirectly)”. And the business scope of securities companies with foreign equity participation is changed only in Clause 1, Article 5: “(1) Underwriting and sponsoring the issuance of shares (including ordinary Renminbi– denominated common shares and foreign-investment shares, and bonds (including government bonds and corporate bonds) ;“ , which only add “sponsoring” on the basis of the business scope provided by the previous Rules.

The revised Rules also amend some of the articles of the previous Rules which lagged behind relevant laws and regulations. In comparison with those set out earlier, the revised Rules allow wider access to the securities industry for foreign investors, whilst including more suitable supervisory measures. As while some of the main restrictions remain, the opening up of China's securities industry seems to be effected in a gradual way, and the governmental protection of domestic securities companies will not be completely lifted within the foreseeable future.

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