Name: Guidelines on Supervision and Administration of Direct Investment Business of Securities Companies (《证券公司直接投资业务监管指引》, the “Guidelines”)
Issuing authority: China Securities Regulatory Commission (“CSRC”)
Effective Date: 8 July 2011
Subject: Direct Investment Business of Securities Companies
The Guidelines, following the introduction of trial operation in 2007, are expected to broaden the investor base of and revenue from direct investment for securities companies.
- The Guidelines permit securities companies to establish direct investment funds and raise money for them from third party institutional investors. The number of investors for a single fund is capped at 50. Previously, during the trial period, securities companies could only conduct direct investment using proprietary funds.
- The aggregate amount of investments by a securities company in direct investment subsidiaries, direct investment funds, industrial funds, and fund management institutions cannot exceed 15% of its net capital.
- Securities companies are required to set up subsidiaries for the purpose of conducting direct investment business. Only subsidiaries may carry out the direct investment business or establish direct investment funds.
- In view of the role of securities companies in advising on and underwriting IPOs - the main exit mechanism for their direct investments, the Guidelines seek to prevent conflict of interests through these requirements:
- Investment banking personnel and other practitioners of a securities company are prohibited from acting in breach of law when engaged in direct investment business. Senior management personnel and other practitioners of the direct investment subsidiary have to be full-time employees of the subsidiary and are not allowed to receive any compensation from the securities company.
- Not all members of the investment decision-making committee of the direct investment subsidiary need to be employees of the subsidiary, provided that more than half of the members are employees of the subsidiary and that management personnel and professionals that conduct investment banking business in the securities company are not members of the committee.
- To the extent that a securities company is mandated as the guidance institution, financial advisor, sponsor or lead underwriter to a company which intends to be listed, the direct investment subsidiary, direct investment funds, industrial funds, and fund management institutions of the securities company cannot invest in such company from the day of acceptance of the mandate or commencement of any substantial work.
If you would like to discuss anything regarding this Alert please contact Fang Jian (Shanghai/Beijing), Nicola Mayo (Shanghai), Simon Poh (Shanghai), or Betty Yap (Hong Kong).