A landmark QFII case: Nanning Sugar vs Martin Currie

First claim vs QFII

This would be the first such case involving a QFII investor. It would also be the first time that a listed Chinese company has brought such a claim against its shareholders for short-term share trading in alleged breach of Chinese securities law.

Court proceedings postponed

Although the case was accepted by the court in June 2008, it is understood that the court proceedings for the dispute have not yet commenced. It is said that that the delay was due to the complex procedure involved – since several parties to this dispute are foreign companies, the evidence collection procedure would take longer than usual.

Assets continue to be frozen until
June 2009

The Nanning courts initially ordered the relevant local bank deposits and assets of MCIM, totalling Rmb39.6 million, to be frozen between June 10 and December 9 2008. Since the court proceedings have since been postponed, the court said it will continue to freeze MCIM's bank deposits until June 9 2009.

Chinese securities law

Article 47 of the PRC Securities Law provides that “where any director, supervisor and senior manager of a listed company or any shareholder who holds more than 5% of the shares of a listed company, sells the stocks of the company as held within six months after purchase, or purchases any stock as sold within six months thereafter, the proceeds as generated therefrom shall be incorporated into the profits of the relevant company. The board of directors of the company shall take back the proceeds.”

Article 2 states that the trading of stocks as lawfully recognised by the State Council within the territory of the PRC shall comply with the provisions of the PRC Securities Law.

QFIIs regulated by PRC Securities Law?

Some legal practitioners and experts have argued that since Martin Currie, MCIM, and MCI are foreign companies, their share trading activity would only be regulated by the QFII regulations and would not be subject to the application of the PRC Securities Law.

The Administration of Securities Investments in China by Qualified Foreign Institutional Investors Measures (QFII Measures) do not include any specific provisions concerning share trading by QFIIs. However, Article 4 of the QFII Measures provides that a QFII shall comply with PRC laws and regulations. As such, MCIM's trading of Nanning Sugar shares could be subject to the PRC Securities Law as some securities lawyers and legal experts have argued.

Concerted parties, or not

Lawyers and legal experts have expressed views that in accordance with Articles 12 and 83 of the Measures for the Administration of the Takeover of Listed Companies (Takeover Measures), MCI, MCIM and MC would constitute “concerted parties” (whereby an investor expands the amount of voting right of shares of a listed company it can control jointly with other investors by way of agreement or other arrangements) and thus the equity held by Martin Currie and its concerted parties in a listed company (Nanning Sugar in this case) shall be calculated on a consolidated basis and they would be caught under the 5% rule.

It is said that MCIM claimed that as a QFII it did not buy/sell all the said shares in Nanning Sugar but traded some of those shares for other QFIIs – holding those Nanning Sugar shares do not make them “concerted parties” so MCIM's total holding did not exceed 5% and therefore there was no breach of Chinese securities law.

Landmark case

This QFII dispute is one of the most eagerly-awaited judicial decisions in China in recent years. QFIIs and foreign investors are casting a keen eye on the development of this case. Whatever the outcome might be, it will certainly become a landmark case for the Chinese financial industry and will have significant ramifications for all QFIIs investing in listed Chinese companies in the future.