FIP Measures boost Shanghai's PE industry

Jin Mao PRC Lawyers

Henry Mao and Lawrence Ho
[email protected]; [email protected]

he door for foreign direct investment in the private equity business in Shanghai was officially opened recently. As of March 3 2010, global private equity firm Carlyle Group and China's largest private conglomerate Shanghai Fosun Group co-incorporated in Shanghai an Rmb fund in the form of a partnership to undertake private equity (PE) investment. This was the first business licence granted in China to a foreign-invested partnership (FIP) for PE investment. Just one day later, China's first foreign-invested PE management company, Shanghai Xin Chong Equity Investment Management Company, also chose to set up in Shanghai.

These two 'firsts' were registered in accordance with the Measures for the Administration of the Establishment of Partnerships in China by Foreign Enterprises or Individuals (外国企业或者个人在中国境内设立合伙企业管理办法) (FIP Measures) promulgated by the State Council on December 2 2009, and the Provisions for the Administration of the Registration of Foreign-invested Partnerships (外商投资合伙企业登记管理规定) released by the State Administration of Industry and Commerce (SAIC) on January 29 2010 – both of which came into force on March 1 2010.

The new rules pave the way for foreign PE investors who had previously used limited partnerships as their preferred investment vehicle for organising Rmb funds in China. This was because of their flexibility in terms of internal organisation and tax privileges.

But although the PRC Partnership Enterprise Act 2007 had allowed foreign investors to establish partnerships in China, this had not been possible in practice due to the absence of explicit regulations for registering partnerships by foreign investors. This gap has now been filled by the new rules.

Pursuant to the new rules, foreign investors are able to set up FIPs in China either by themselves or through cooperation with domestic individuals or entities. A significant feature of the new rules is that the incorporation of an FIP does not require approval from the Ministry of Commerce (Mofcom) before registration with SAIC, though the Foreign Investment Industrial Guidance Catalogue (国家发展和改革委员会、商务部外商投资产业指导目录) still applies.

The FIP Measures generally require foreign investors to make contributions in foreign currencies or Rmb, while minimum capital requirements are not given. Furthermore, General Partners (GPs) are allowed to make capital contributions in the form of services rather than cash or assets, and existing taxation rules governing domestic partnerships will apply to FIPs.

The newly-established PE partnerships mark a major step in Shanghai forging a PE investment platform on its way to becoming a global financial hub by 2020. Shanghai has actually outpaced other Chinese cities in attracting PE firms and maintained its development momentum over the past few years by granting a series of advanced policies and incentives.

On June 2 2009, the local government of Shanghai Pudong New Area issued the Pudong New Area of Shanghai Municipality, Trial Measures for the Establishment of Foreign-invested Equity Investment Management Enterprises (上海市浦东新区设立外商投资股权投资管理企业试行办法) (Pilot Measure), which is effective until June 20 2010. Subject to the Pilot Measure, foreign investors are permitted to set up foreign-invested equity investment management enterprises (FIEIMEs) in the form of equity joint ventures, cooperative joint ventures or Wholly Foreign Owned Enterprises(WFOEs).

This was the first rule in China permitting the establishment of FIEIMEs. The Pilot Measure opened the possibility of offshore PE fund managers establishing a PE fund management vehicle in Shanghai through which Rmb PE funds could be indirectly formed in China by and between Chinese Limited Partners (LPs) and onshore FIEIMEs (which act as the GPs).

Prior to the Pilot Measure, on August 11 2008 Shanghai promulgated the Circular on Issues Concerning the Registration of Equity Investment Enterprises in Shanghai to stipulate the basic requirements and procedures for establishing PE management enterprises. And, on March 30 2009, the local government of Pudong New Area promulgated the Implementation Measures of the Pudong New Area on Promoting the Development of Equity Investment Enterprise and Equity Investment Management Enterprise, providing incentive policies under which certain bonuses and subsidies would be awarded to PE funds as well as to their management. Up to the present day, Pudong is reported to have granted benefits of up to Rmb15 million (US$2.2 million) to PE investors.

At the time of going to press it has been reported that, following repeated discussions with State Administration of Foreign Exchange (Safe), a trial scheme for the participation of FIE capital into Rmb funds has been approved by the Shanghai government and is expected to be implemented in Pudong initially. The trial scheme should prove to be a breakthrough against obstacles caused by Safe's Circular 142, which prevents FIEs from using converted registered capital for equity investment and limits FIEs from participating in onshore funds as GPs or LPs.