Shanghai implements new private equity policy

Foreign firms in the Shanghai Pudong New Area are now allowed to register as equity investment management enterprises. The pilot policy begain in June and will expire at the end of June, next year.

China is allowing foreign private equity and venture capital firms operating in the Shanghai Pudong New Area, a district of Shanghai as well as China’s financial centre and a special economic zone, to register as equity investment management enterprises.

This will allow them greater flexibility to provide…..

The Chinese government aims to attract more foreign capital to the country with this new policy, according to a statement from the Pudong New Area Government.

Currently, most foreign firms have local affiliate offices or consultant companies that make investments in China from off-shore vehicles subject to approval by the Ministry of Commerce.

“A consulting company has broad business scope but may not specifically provide investment management

Shanghai Pudong

related consulting services, and a representative office, technically speaking, may only carry out liaison work for its parent company,” Maurice Hoo, a partner at Paul Hastings Janofsky & Walker's Private Equity Group, said in an interview. 

In comparison, equity investment management enterprises do have consulting business scope and the consulting ties to investment management specifically, Hoo pointed out.

Under the new policy, foreign private equity and venture capital firms are to have registered capital of at least $2 million. The $2 million has to be paid up within two years, with at least 20 percent of the amount to be paid up within three months of the enterprise receiving a license, the statement said.

To control financial risk, the policy stipulates that such enterprises must have at least one investor. Each enterprise needs to have two or more executives with more than two years of experiences in equity investment or equity investment management. These executives should also have more than two years of experience in a senior managerial role, according to the statement. 

The new policy is “positive news”, according to Hubert Tse, a managing director and head at Shanghai-based Yuan Tai PRC Attorneys, in an interview. “Having a Chinese entity participate in the domestic market enables foreign firms to raise their profiles in the country and gives them more opportunities to work with their domestic counterparts,” he said. “Given the $2 million in register capital condition, we can probably expect bigger firms to have a deeper interest in this,” added Tse.

Enterprises under the new policy will also attract capital and talent to be based in Shanghai Pudong New Area, Tse said.

Shanghai is the first Chinese city to implement this pilot policy, which might explain its expiration dates of 30 June 2010, said Hoo. The policy commenced this June.

The new policy follows a guideline issued by China’s state council in March, aimed at developing Shanghai into a global financial and shipping centre by 2020. The guideline gave the city priority “to carry out financial innovation as well as other preferential policies”, according to the official website of Shanghai municipality.