On December 28, 2007, the China Securities Regulatory Commission ("CSRC") promulgated the revised Rules for Establishment of Securities Companies with Foreign Equity Participation ("New Rules"). The New Rules, which became effective January 1, 2008, seek to lessen governmental restrictions on new foreign investment into the Chinese securities industry while at the same time ensuring Chinese control by limiting foreign investors to minority shareholder status.

Outlined below are a few key provisions of the New Rules that are likely to be of interest to foreign investors in China's securities industry:

  • Expanded Opportunities for Institutional and Other Investors. Under the previous rules, only foreign investors engaged in the securities industry in their home countries were permitted to have equity participation in Chinese domestic securities companies. Under the New Rules, participation in the Chinese securities industry is expanded to those companies who are qualified in the finance industries in their home countries. In addition, the New Rules reduce the amount of time that a foreign investor is required to be engaged in the finance industry in their home countries from 10 years to five years.
  • Expanded Availability of Organizational Forms. Under the previous rules, the organizational form of securities companies with foreign equity participation was limited to that of the limited liability company. Under the New Rules, limitations on organizational form have been relaxed, although securities companies with foreign equity participation must still be in compliance with the PRC Company Law, the Securities Law, and rules of the CSRC. Thus, foreign funded securities companies can be incorporated not only as limited liability companies, but also as joint stock companies.
  • Acquisition of Shares Through Domestic Stock Market. Under the New Rules, foreign investors are expressly allowed to hold shares of a listed domestic-funded securities company through acquisition of shares via legally established stock exchanges or develop strategic cooperative relationships with listed domestic-funded securities company upon the approval of the CSRC.
  • Limitation on Shareholdings of Foreign Investors. Pursuant to the New Rules, an individual foreign investor may not hold, whether directly or indirectly, more than 20% of the shares of a listed domestic-funded securities company. In addition, shares held, whether directly or indirectly, by all foreign investors may not exceed 25% of the shares of a listed domestically-funded securities company.

While the relaxation of investment restrictions into the Chinese securities industry opens new opportunities for foreign financial institutions, the CSRC continues to closely regulate foreign investment. During this time of change, practitioners are advised to carefully monitor the implementation of the New Rules in the months to come.