Rules on set-up and administration of joint venture securities companies

China

Regulations have recently been issued to permit sino-foreign joint venture securities companies.

Two pieces of new regulations

During the last several months, the China Securities Regulatory Commission (CSRC) has been formulating rules on approval and administration of joint venture securities companies. The draft Regulations for Examination and Approval of Joint Venture Securities Companies (Examination and Approval Regulations) were circulated for public comment in December 2001 and will be issued in due course. Regulations on the Administration of Securities Companies (Administration Regulations) were formally promulgated by CSRC on 28 December 2001 after a period for comment and came into effect as of 1 March 2002.

Under the draft Examination and Approval Regulations, foreign investors can acquire a stake in a securities company and can inject capital into a securities company.

The ownership interest of the foreign partner in a joint venture securities company should not be less than 1/4 and should not exceed 1/3, as compared to the Chinese partners' interest. The interest of the Chinese partner should be not less than 1/3.

The foreign investor must come from a country where the institution in charge of securities supervision and management has signed a Memorandum of co-operation on securities supervision with CSRC and maintains co-operative relations with CSRC. The foreign investor should have conducted finance business for more than ten years. The foreign investor must be a securities firm in compliance with legislation and requirements of the securities supervisory authority of its home country. The foreign investor should have an excellent reputation for outstanding achievement in the international market.

Requirements for approval of joint venture securities companies are set out in the draft Examination and Approval Regulations as follows: 1. Registered capital should be no less than 500 million RMB (around USD 40 million). 2. The joint venture securities company must employ at least 50 Staff qualified to engage in the securities business. 3. The company should have qualified accounts, lawyers and IT experts on staff. 4. The company should have sound internal management and risk control system ready, as well as a system for management of underwriting, brokerage and self-operation in the aspects of personnel, financing and information.

The Administration Regulations focus on the supervision and administration of securities companies, and apply to all securities houses registered in the PRC. Securities companies are categorised as either comprehensive or brokerage securities companies. A brokerage securities company may act as a broker for an investor in securities trading, redemption, distribution of dividends and interest, custody and account maintenance. A comprehensive securities company may engage in securities dealing for its own account, underwriting securities, providing securities investment advice and portfolio management. Foreign participation is permitted in comprehensive and brokerage securities companies.

The Administration Regulations also set out conditions for establishing an internet-based securities brokerage company. Provisions on corporate governance and risk management control are raised. There are also qualification requirements for personnel and senior officers of securities companies.

For further information on this please contact Luke Filei on luke.filei@cms-cmck.com or +86 10 6590 0389 in Beijing or +86 21 6289 6363 in Shanghai.