China publishes new rules on equity holdings in banks and insurance companies

In the first quarter of 2018, China Banking Regulatory Commission (“CBRC”) and China Insurance Regulatory Commission (“CIRC”) published new rules on equity holdings in banks and other non-bank financial institutions, and insurance companies respectively. The new rules apply to both Chinese-funded and foreign-funded institutions in the relevant sectors. Foreign-funded institutions will continue to be subject to certain specific rules under the pre-existing regimes.

Banks and other non-bank financial institutions (effective now)

Broad limits on equity holdings in commercial banks. An investor (including its affiliates and concert parties) cannot be a substantial shareholder of more than two commercial banks. A “substantial shareholder” is one who holds a stake of 5% or more or otherwise has significant influence over the bank’s operation (including appointment of directors or senior management, ability to influence the finance and business decisions of the bank). In addition, an investor cannot be a controlling shareholder of more than one commercial bank. A controlling shareholder is one who holds a stake of 50% or more or otherwise has significant influence over the resolutions of the shareholders’ meeting of the bank. The CBRC requires substantial shareholders and controlling shareholders of banks in breach of the new rules, who had acquired their equity stakes before the new rules came into effect, to rectify the situation including by seeking CBRC approval for investments not previously approved and selling, within a grace period, investments that are in breach of the restrictions on financial products (see below).

Approval threshold. The rules on CBRC approval of equity investments have been clarified. An investor (together with its affiliates and parties acting in concert) will need to obtain prior approval from the CBRC or its local counterparts before it acquires 5% or more of the shares of a commercial bank for the first time, and also if it increases its shareholding in such bank by 5% or more in aggregate. In the case of an acquisition of shares in a commercial bank of the same percentage through an onshore or offshore securities exchange, the approval given by the CBRC will have a 6-month validity period. All shareholding changes in foreign-funded banks (irrespective of percentage) continue to require CBRC approval.

Source of funds. Under the new rules, investors can only use their own funds to invest in banks, and not invest as a nominee of another person. Investments through financial products, such as asset management and trust plans, cannot result in the same institution controlling more than 5 per cent. of a bank’s shares. Substantial shareholders may not use any financial products that they issue or manage to increase their control of the bank’s shares.

Lock-up. The new rules retain the existing lock-up on substantial shareholders, who are prohibited from transferring shares of commercial banks within 5 years from the date of acquisition.

Reporting requirements for minority shareholders. To ensure that it possesses adequate information on the ultimate beneficial shareholders of commercial banks, the CBRC now requires that any investor (together with its affiliates and parties acting in concert) acquiring between 1% and below 5% of the shares of a commercial bank must report to the CBRC within ten working days of such acquisition. Information to be reported to the CBRC includes the financial status of the shareholder, the shareholder’s actual controller or ultimate beneficial owner, source of funds for the acquisition, details of related party transactions with the bank, security interests over the shares, and any other negative information on the shareholder which may be detrimental to the bank. The same reporting requirement is also applicable to investors who acquire the same percentage of shares in a listed commercial bank.

Additional obligations on substantial shareholders. The new rules preserve the position that substantial shareholders of a bank are required to make an undertaking to replenish the bank’s capital and report to the bank on their ability to provide such additional capital on a yearly basis. Substantial shareholders must now disclose certain additional information to the bank and changes thereto, including their sources of funding and ultimate beneficial owner, pledges over the bank’s shares, and any developments that may affect their qualifications to invest in the bank (compliance with which must, therefore, be monitored on an ongoing basis).

The new rules apply by reference to loan companies, financial asset management companies, trust companies, group finance companies, financial leasing companies, automobile finance companies, money brokerage companies and consumer finance companies.

Insurance companies (effective 10 April 2018)

Investor categories
. Domestic and foreign investors in PRC insurance companies are to be divided into four categories, each demarcated according to level of shareholding in the target, as follows:

  • Type I financial investor – less than 5%
  • Type II financial investor – from 5% to below 15%
  • Strategic – from 15% to below one-third
  • Controlling – one-third or more

Investors in the respective categories are required to satisfy different criteria. In addition, specific criteria apply to different types of investor, such as partnerships, asset management schemes and foreign banks (though listed company Type I financial investments are generally exempt from compliance with the criteria). Under the pre-existing regime, additional criteria apply to shareholdings in foreign-funded insurance companies.

Source of funds. Insurance company investments must be funded by the investor’s own resources, not the target’s capital. The investment amount cannot exceed the investor’s net assets, and assignment of beneficial ownership or future income to financiers is prohibited.

Lock-up. Prohibitions on transfer of varying length apply from the day the investment is acquired (one year to five years). Listed company Type I financial investments are not subject to lock-up.

Shareholding limit. The shareholding of an investor, its affiliates and concert parties in an insurance company cannot exceed one-third. It is unclear how this new limit will apply to foreign-funded insurance companies, many of which have foreign shareholdings of between 50 to 100%. CIRC stated, in a press release, that it is in the process of drafting implementing rules to provide more guidance.

Limit on multiple holdings. An investor, its affiliates and concert parties cannot (i) have a controlling stake in more than one insurance company in the same line; (ii) (if the investor is an insurance company) establish and run another insurance company in the same line; or (iii) have a strategic or controlling investment in more than two insurance companies.

Exemption. The restrictions in the two preceding paragraphs do not apply to an insurer investing in another insurer to undertake innovative or specialised business or for group management functions.

Approvals and filings. Applications for approval (for investments of 5% and above) and filing (for investments below 5%) must be submitted to CIRC within three months of signing the transaction agreement. The target company is required to submit prescribed corporate, financial, governance and supplementary (including regulatory reports and indicators) information to CIRC for all new shareholders, though listed company Type I financial investments are exempt. Changes of shareholders holding less than 5% of an insurance company’s shares must be disclosed on the insurance company’s and CIRC’s website, in addition to being filed with CIRC.

New approval requirement. When an investor’s shareholding in a listed PRC insurance company reaches 5%, 15% and one-third, respectively, CIRC approval is required. The target must be notified within 5 business days of the transaction, and must apply to CIRC for approval within 10 business days of receiving notification.