Introduction

Amid fierce competition among insurers, increasingly more investors – both domestic and foreign – are striving to enter the Chinese insurance market.

The regulations concerning investment limits and the required qualifications for shareholders that want to invest in Chinese insurers continue to be a focal point for potential investors. On December 29 2016 the China Insurance Regulatory Commission (CIRC) published the Administrative Measures for Equities of Insurance Companies (Draft for Comments). When they are passed and officially enforced in the near future, the final draft measures will affect:

  • the Notice of the CIRC on Issues Relating to Article Four of the Administrative Measures for Equities of Insurance Companies, published on April 9 2013; and
  • the Administrative Measures for Equities of Insurance Companies (Revised 2014), enacted by the CIRC on June 1 2014.

Under these circumstances, it is pertinent to analyse some of the major changes that the draft measures (as they stand) will introduce.

Key changes

Shareholder categories The draft measures introduce criteria to divide shareholders of insurers into three new categories according to their shareholding percentages and qualifying conditions and their impact on the insurer's business operations and management – namely:

  • financial shareholders – that is, shareholders that hold less than 10% of the insurer's equity and have no significant impact on its business operations and management;
  • strategic shareholders – that is, shareholders that hold:
    • between 10% and 20% of the insurer's equity; or
    • less than 10% of the insurer's equity, but whose holding is sufficient to exert a material impact on its business operations and management; and
  • controlling shareholders – that is, shareholders that hold:
    • at least 20% of the insurer's equity and also have a controlling influence on its business operations and management; or
    • less than 20% of the insurer's equity, but could still have a controlling influence on its business operations and management.

Shareholder qualifications

The draft measures specify that investors which satisfy the relevant provisions prescribed therein – which could include corporations, limited partnership enterprises, public institutions, social groups and overseas financial institutions – may become shareholders of an insurer. However, limited partnership enterprises, public institutions and social groups are limited to becoming financial shareholders. Referring to natural persons, the draft also holds that by purchasing shares in a publicly listed insurance company on the stock market in China, a natural person can (to the extent that he or she can access the relevant Chinese stock market) become a financial shareholder of that listed insurer.

For investors applying to become one of the abovementioned types of shareholder in a Chinese insurer, the draft measures set out specific qualification requirements that investor applicants must meet, which differ according to their classification.

Financial shareholders To apply as a financial shareholder, the potential investor must:

  • have a good financial status;
  • have been profitable for the past fiscal year;
  • provide records of regular tax payments; and
  • have made no tax violations in the past three years.

Further qualification requirements include:

  • records showing a favourable recent credit history;
  • no record of dishonest behaviour or grave violations of laws and regulations over the past three years;
  • a good compliance standing; and
  • any other requirements that apply under the CIRC's laws, administrative regulations and provisions.

Strategic shareholders To apply as a strategic shareholder, in addition to meeting the requirements for a financial shareholder, the applicant must:

  • have an outstanding core business and sound record of investment activity;
  • occupy a leading position in the insurance industry with a good reputation;
  • have a strong ability to make capital contributions on an ongoing basis;
  • have been profitable for the past three consecutive fiscal years;
  • have a strong balance sheet with net assets of no less than Rmb200 million, together with positive retained earnings;
  • have a balance of long-term equity investments (including existing investment projects) that do not exceed its net assets (according to consolidated financial statements); and
  • meet any other requirements that apply under the CIRC's laws, administrative regulations and provisions.

Controlling shareholders To apply as a controlling shareholder, in addition to meeting the requirements for financial and strategic shareholders, the applicant must:

  • have had total assets of no less than Rmb10 billion at the end of the preceding year;
  • have net assets forming 30% or more of its total assets;
  • have an asset liability or financial leverage ratio that is not significantly higher than the industry's average level; and
  • meet any other requirements that apply under the CIRC's laws, administrative regulations and provisions.

The draft measures also specify particular requirements for the different types of investor on the basis of their own conditions.

Means of acquiring equity

According to the draft measures, investors can acquire equity by:

  • initiating the establishment of an insurer as a promoter;
  • entering into an agreement to subscribe for shares issued by an insurer;
  • reaching an equity transfer agreement to be assigned equity from existing shareholders as a transferee;
  • winning a public tender, if the existing shareholders hold an open auction for shares;
  • purchasing the shares of insurers listed on the Chinese stock market;
  • purchasing convertible bonds that can be converted into equity once the conditions, as agreed in the relevant contracts, are satisfied;
  • realising a right to pledged shares by complying with relevant provisions as the pledgee;
  • participating in a risk-based disposal plan arranged by the CIRC; or
  • undertaking any other method approved and admitted by the CIRC.

Prohibitions regarding acquisition of equity

The draft measures expressly prohibit the acquisition of equity in an insurer through the use of the following funds, obtained either directly or indirectly:

  • borrowings relating to an insurer;
  • funds obtained against the pledges of an insurer's deposits or other assets;
  • relevant funds obtained through an insurer's investment trust schemes, private equity funds or equity investment, among other things; and
  • funds obtained owing to the improper use of financial influence by an insurer or by virtue of an illegitimate affiliation with an insurer.

Shareholding ratios

The draft measures emphasise that the shareholding ratio of:

  • any single shareholder is to be limited to one-third of an insurer's general capital; and
  • any single limited partnership enterprise is to be limited to 5% of the general capital (with the total shareholding ratios of all limited partnership enterprises simultaneously holding shares in an insurer being restricted to 15%).

However, restrictions on shareholding ratios will not apply where:

  • an insurer invests in the establishment of another insurer due to a need for business innovation, specialisation or group-style business operations, provided that the equities held by the former in the latter shall exceed 50% within five years; or
  • following the CIRC's approval, an investor obtains equity through participation in risk-based disposal measures taken against an insurer.

When calculating shareholding ratios for this purpose, the shareholding ratios of affiliated shareholders shall be combined.

Number of insurers that a shareholder can invest in

An investor may be the controlling shareholder of only one insurer engaging in a certain type of business, except under special circumstances – such as participating in a risk-based disposal plan – following the CIRC's special approval. Similarly, an investor is prohibited from becoming a strategic shareholder in more than two insurers simultaneously (two is allowed). An investor applying as a financial shareholder is unrestricted in the number of insurers in which it may invest.

Investment by way of trust funds or funds under entrusted management

Trust, fund and financial companies and other institutions may invest in insurers with trust funds or funds under entrusted management, but may become only financial shareholders and must progressively disclose, level by level:

  • the holders of the relevant trust schemes or funds under entrusted management; and
  • any affiliations with the insurer and other investors in the insurer.

Transfers of equity

A controlling shareholder cannot transfer any equity held within three years from the date of the insurer's establishment. For strategic and financial shareholders, the restriction period is limited to two years and one year, respectively.

Comment

The draft measures make fundamental changes to the existing regulatory framework. Observers look forward to seeing its positive influence on the Chinese insurance market.

For further information on this topic please contact Hao Zhan, Chen Jun, Yu Dan or Dong Xin at AnJie Law Firm by telephone (+86 10 8567 5988) or email (zhanhao@anjielaw.com, chenjun@anjielaw.com, yudan@anjielaw.com or dongxin@anjielaw.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.?

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