The Shanghai Stock Exchange (“SSE”) issued its Detailed Implementation Rules (“SSE Rules”) for Securities Trading by Qualified Foreign Institutional Investors (“QFIIs”) and Renminbi Qualified Foreign Institutional Investors (“RQFIIs”, and together with QFIIs, “Qualified Investors”) effective as of March 19, 2014. Shortly after, the Shenzhen Stock Exchange (“SZSE”) issued its own rules (“SZSE Rules”) effective as of April 25, 2014, which are substantially the same as the SSE Rules (for the purpose of this Alert, the SSE Rules and the SZSE Rules are referred to as the “Qualified Investor Rules”). Under the Qualified Investor Rules, QFIIs and RQFIIs are consolidated for uniform regulation in light of the similarities between the two programs.
The Qualified Investor Rules reflect the most recent regulatory requirements of the China Securities Regulatory Commission (“CSRC”) under its July 2012 QFII Provisions1 and March 2013 RQFII Provisions2 (collectively the “CSRC Regulations”). The key features of the Qualified Investor Rules are as follows.
I. ELIGIBLE PRODUCT TYPES
The CSRC Regulations specify the scope of products eligible for investment by Qualified Investors, including but not limited to stocks, bonds and warrants traded or transferred on the SSE/SZSE. The Qualified Investor Rules further enumerate the foregoing eligible stock-exchange traded or transferred products as follows3:
(1) stock, including common stock, preferred stock and other stock recognized by SSE/SZSE;
(2) bonds, including treasury bonds, when-issued trading treasury bonds, local government bonds, corporate bonds, enterprise bonds, convertible corporate bonds, convertible corporate bonds with warrants, exchangeable corporate bonds, privately placed bonds by small and medium enterprises, policy-oriented financial bonds, subordinated bonds, and other bond products recognized by SSE/SZSE;
(3) funds, including various types of ETFs, closed-end funds, open-end funds, money market funds and other fund products recognized by SSE/SZSE;
(5) asset backed securities; and
(6) other types of securities products permitted by the CSRC.
This is the first time that Qualified Investors are expressly allowed to invest in asset-backed securities.
II. MAXIMUM SHAREHOLDING PERCENTAGE REQUIREMENTS
The Qualified Investor Rules reiterate the restrictions on maximum shareholdings set forth under the CSRC Regulations with minor technical clarification:
(1) a single foreign investor’s investment in the shares of a China-listed company held through Qualified Investor(s) shall not exceed 10% of the total shares of the listed company;
(2) the total number of A shares held by all foreign investors in a single China-listed company shall not exceed 30% of the total shares of the listed company.
Under the Qualified Investor Rules, if the total number of A shares held by all foreign investors in the same listed company reaches or exceeds an aggregate of 26% of the total shares of a company, SSE/SZSE will publish this aggregate percentage on its website before the opening of the following trading day. The Qualified Investor Rules also set out detailed procedures for close-out/reduction of excessive positions in order to ensure the above-mentioned maximum threshold is kept.
III. REPORTING REQUIREMENTS
The PRC custodian bank and the PRC securities company(ies) of a Qualified Investor are required to file with SSE/SZSE basic information of the Qualified Investor as well as basic information of the PRC custodian bank and the PRC securities company(ies). The PRC custodian bank is required to report relevant information upon the occurrence of any specified major event on the part of the Qualified Investor within 5 business days of the occurrence of the event, such as when (i) the Qualified Investor changes its name or legal representative; (ii) the controlling shareholder of the Qualified Investor is changed; (iii) the Qualified Investor increases or decreases its capital; (iv) the Qualified Investor is implicated in any material proceeding or other material event; (v) any major sanctions are imposed on the Qualified Investor outside China; or (vi) the Qualified Investor is sanctioned by CSRC or the State Administration of Foreign Exchange etc.
In the event of any irregular trading, SSE/SZSE may require the Qualified Investor to report the securities trading of the de-facto investor(s) underlying the Qualified Investor as well as the shareholding held by the Qualified Investor.
IV. COMPUTATION OF SHAREHOLDINGS FOR THE PURPOSE OF INFORMATION DISCLOSURE
The Qualified Investor Rules require that when making disclosures in accordance with its disclosure obligations, each Qualified Investor and de-facto investor underlying the Qualified Investor shall separately compute its aggregate holdings of the onshore listed shares and offshore listed shares of the same listed company, and comply with the relevant laws and regulations governing information disclosure.
This provision is helpful to clarify the long-questioned issue whether the shares held by a Qualified Investor and its de-facto investors should be calculated on a consolidated basis for the purpose of the PRC securities and company laws. According to this provision, for information disclosure purposes, the shares held by the Qualified Investor and its de-facto investors will not be calculated on a consolidated basis solely because a de-facto investor indirectly invests in A-shares through a Qualified Investor.
The Qualified Investor Rules will help to promote the development of the QFII program and the RQFII program by clarifying the scope of eligible products traded or transferred in the SSE and the SZSE and some technical issues.
1A Bingham alert can be found under China Adopts Final Rule to Ease Regulation on QFIIs.
2A Bingham alert can be found under China Expands RQFII Program to Boost Chinese Mainland Capital Market and Hong Kong Fund Market.
3Qualified Investors are allowed to subscribe for initial public offerings of stocks, issuances of bonds, and follow-on stock issuances and share allotments.