China issues draft fund registration rules(2)

A policy draft released for public comment by the CSRC aims to provide clarity for PE and VC fund registration in China. It also shifts PE regulatory power to the CSRC.

The China Securities Regulatory Commission has released a new draft of implementation rules for the Securities Investment Fund Law, called the ‘interim measures’, and is currently seeking public comment, according to the CSRC website.

The draft provides more detail and clarity as to exactly which funds must register with the CSRC. Specifically, if a fund invests a cumulative amount of RMB 100 million (€12 million; $16 million) in securities – which include bonds, shares, and mutual funds – it then has to register with the Asset Management Association of China (AMAC), a self-regulatory organisation founded by the CSRC for funds.

The draft is an attempt to bring order to the industry by setting registration rules. Before, registration was always a question mark for private equity funds in China. Sometimes funds would register with the National Development and Reform Commission, sometimes the CSRC, sometimes not at all. 

“The primary purpose of the interim measures lies in making the laws clear regarding the position of private equity fund managers and to understand the fundamental situation of their business. It will not change the current operations of the private equity industry, nor increase its regulatory costs,” the CSRC statement said.

However, the implementation of these new rules will fundamentally change how private equity funds in China have to report to the government, according to Ying White, partner at Clifford Chance.

Clause four in the draft specifically details private equity and venture capital funds, and sets requirements for being approved as a “fund manager”, she told Private Equity International.

The RMB 100 million in securities investments is actually quite a low bar for Chinese funds, White said, and thus the new law will probably impact more than half the existing private equity funds in China. White says she is already getting calls from private equity fund managers about the draft.

Some fund managers will likely request that the CSRC raise the RMB 100 million threshold. But there is a catch to that solution, as well.

“If they raise the bar, and you [as a fund] don’t register, then you cannot call yourself a fund manager,” White explained.

The draft also made it clear that funds that didn’t meet registration requirements would not be allowed to designate their firms as “private equity”.

The interim measures draft also indicates that China's private equity industry regulation is beginning to shift toward the domain of the CSRC and away from the NDRC, White said.

“Within two to three years, all funds will probably have to register with the AMAC.”

The AMAC is currently drafting the exact reporting requirements for registered funds, and White expects those to be released in the next few weeks. In the meantime, private equity lawyers will continue reviewing the draft.