China’s CSRC issues draft regulation on PE supervision

While the National Development and Reform Commission (NDRC) is currently responsible for renminbi-denominated private equity funds, the CSRC has been encroaching upon its territory. Earlier this year, PE was excluded from the revised Securities Investment Funds Law, which would have put it under the CSRC's purview, but the securities regulator is unrelenting.

Under the draft rules, which have been disclosed in order to solicit public feedback, PE and VC firms - and also "sunshine funds" that invest privately raised capital in public companies - would be required to register with AMAC. The organization is sometimes known as Securities Investment Fund Industry Association and has close ties to the CSRC.

To meet the criteria for registration, funds must have at least RMB10 million ($1.6 million) in paid-up capital; be managed by two licensed individuals plus a risk control officer; have no record of illegal activity or adverse credit in the last three years; and have investment exposure to publicly issued securities with a value of at least RMB100 million.

Even if a private equity firm doesn't do PIPE deals, it would likely fall under the rules by virtue of exiting portfolio companies on domestic bourses. Several leading PE firms, ranging from Hony Capital to Shenzhen Capital Group, have already voluntarily registered with AMAC as "asset management members." One industry participant argues that this is tantamount to "quasi record-filing with the CSRC."

The draft rules also include definitions of investors deemed qualified to bear the risk of participating in private equity funds. They should have at least RMB2 million in household financial assets, or have an average annual individual income of at least RMB200,000 in the last three years, or an annual household income of at least RMB300,000.

AMAC would be required to file reports to the CSRC on registered funds with more than 50 investors. If approved, the rules would come into effect on June 1.

Given the broad language used in the Securities Investment Funds Law, the CSRC was always going to wield significant influence over "non-publicly offered funds," so the content of the draft rules is not surprising.

While industry participants are not opposed to regulation - the current NDRC guidelines are seen by many as insufficient, allowing smaller funds to evade oversight - they want a single set of rules from a single authority. In this sense, the conflict between the CSRC and NDRC is extremely unhelpful. If there is no reconciliation between the different regulatory standards, private equity firms would have to bear the additional cost burden of complying with both of them.

"When we deal with the NDRC and CSRC it's clear they are at war with each other," one international LP told AVCJ last month. "Both are using industry associations as battlefields to recruit more members and gain influence. As long as the situation remains unclear they will continue the battle. If you are a local GP, which side are you talking to? Or are you talking to both sides?"

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• Topics
• Regulation
• Greater China
• Renminbi fund
• China
• regulation
• Renminbi
• CSRC
• NDRC