China’s Opening-Up - Measures for the Administration of Foreign-Funded Securities Companies

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On 28 April 2018, Measures for the Administration of Foreign-Funded Securities Companies (the “New Measures for FFSCs”) was published and took effect. 

The New Measures for FFSCs are in place to cater for the opening up of the securities market to foreign investors, strengthening and improving the supervision and administration of foreign funded securities companies (“FFSCs”). They specify the conditions and procedures for the formation of FFSCs.

What are FFSCs under the New Measures for FFSCs?

Foreign-Funded Securities Companies (“FFSCs”) governed by the New Measures for FFSCsinclude securities companies established by Chinese and foreign shareholders jointly, securities companies that are modified from being wholly Chinese-owned to being (partly) foreign-owned through share transfers, and securities companies whose ultimate controllers have changed from Chinese investors to foreign investors.

Conditions to be met by foreign investors to be eligible to invest in FFSCs

To be eligible to invest in FFSCs, the foreign investors will need to meet the following conditions:

1.  The country or region where it is located has sound securities laws and regulations, and the relevant financial regulatory authority has entered into a memorandum of understanding regarding securities regulatory cooperation and maintained an effective regulatory cooperation relationship with China Securities Regulatory Commission (“CSRC”) or an institution recognized by the CSRC;

2.  It is a financial institution legally formed in the country or region where it is located, and all its financial indicators in recent three years conform to the laws and regulations of the country or region where it is located;

3.  It has engaged in securities business for five consecutive years or more, has not received any major punishment by regulatory, administrative, or judicial authorities in the country or region where it is located in the recent three years, and is not under investigation by the relevant authorities on suspicion of any major violation of a law or regulation;

4.  It has a sound internal control system;

5.  It has good international reputation and business performance, is a leading company in terms of business scale, revenue, and profits in the recent three years, and has maintained a high rating of long-term credit in the recent three years; and

6.  Other conditions specified by the CSRC.

Upper Limit on Foreign Investments in FFSCs

The New Measures for FFSCs provide that the upper limit on foreign ownership in FFSCs shall comply with “the state’s arrangement regarding the opening-up of securities sector”. The PRC government has already announced its intention to increase the upper limit to 51% and remove any such limit completely after a further three years. We expect that the revised limit will be confirmed in a State Council’s guidance note or the revised Catalogue of Industries for Guiding Foreign Investment in the coming weeks.  Such limit applies to all types of FFSCs including, but not limited to, FFSCs formed as a result of a merger of securities companies or a split of a securities company.

The timeframe for establishing FFSCs

It would normally take CSRC about six months to process applications for setting up a new FFSC or modifying a wholly Chinese-owned securities company to an FFSC.

In the case of setting up a new FFSC, within 6 months of receipt of CSRC approval, all shareholders shall contribute the agreed capital in full or fulfil the agreed cooperation conditions, elect directors and supervisors, appoint senior executives, and apply to the company registration authority for formation registration and a business license. Within 15 days of the issuance of the business license, the FFSC shall apply to CSRC for a securities business permit. Upon receipt of the securities business permit, the FFSC may start its business operation.

In the case of modifying a wholly Chinese-owned securities company to an FFSC, within 6 months of receipt of CSRC’s approval, the securities company shall effect the approved share transfer or capital increase, and apply to the company registration authority for modification registration and a new business license. Within 15 working days of modification registration, the securities company shall apply CSRC for a new securities business permit.

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