Professional Interpretation

Abstract: At the beginning of 2018, China Banking Regulatory Commission (abolished), China Insurance Regulatory Commission (abolished) and China Securities Regulatory Commission (hereinafter referred to as “CSRC”) have successively issued regulations and consultation drafts on equity management of commercial banks, insurance companies and securities companies. On April 27, 2018, the People’s Bank of China, China Banking & Insurance Regulatory Commission and CSRC jointly issued the Guiding Opinions on Strengthening the Supervision over Non-financial Enterprises’ Investment in Financial Institutions (hereinafter referred to as “the Guiding Opinions”), which improved the relevant system of equity management in financial institutions. By interpreting the basic principles of the Guiding Opinions, the Insurance Funds Management Team of Beijing DOCVIT Law Firm makes a comparative analysis of the equity management regulations of commercial banks, insurance companies and securities companies.

Ⅰ. Basic Principles of the Guiding Opinions

1. Based on main business, enterprises should serve the real economy. Enterprises, which invest in financial institutions, should aim at serving the real economy, closely focus on the developmental needs of their main business, and scientifically invest in financial institutions.

2. Enterprises should manage prudently and avoid blind expansion. Moreover, enterprises should rein capitals, control leverage, strengthen risk management and ensure that investment behaviors of financial institutions are compatible with their own capital scale and management level.

3. Regulators should establish strict access standards to scrutinize of shareholders’ qualifications, shareholding structure and funding sources. Specifically, regulators should implement differentiated supervision of financial institutions’ shareholders according to their importance, clarify access and qualification requirements, and penetrate the identification of actual controllers and ultimate beneficiaries. Meanwhile, in order to strengthen the continued management of equity structure, regulators should enhance the supervision in the authenticity of funding sources.

4. Financial institutions should establish firewall between them and shareholder enterprises and strengthen corporate governance and related party transactions supervision. It is strictly prohibited to misappropriate financial institutions’ funds in various ways or improperly interfere with the independent operation of financial institutions. Finally, the legitimate rights and interests of financial institutions and related stakeholders should be safeguarded effectively.

5. Regulators should strengthen the supervision in accordance with the principles of penetration and substance over form, seriously investigates illegal behaviors, and dissolve risks effectively.

6. While insisting that enterprises invest in financial institutions in accordance with the law, regulators support the diversification of equity stakes in financial institutions. Also, it is essential for financial institutions to broaden capital supplement channels and conduct benign interaction with enterprises.

Ⅱ.Qualification of Shareholders in the Guiding Opinions

1. An enterprise, as a controlling shareholder, shall meet the following conditions:

(1) The core business is outstanding and the business development is sustainable.

(2) The enterprise has strong capital strength and the ability of continuous investment. In principle, it is necessary to meet the relevant industry regulatory requirements, such as successive profits in the last three fiscal years, net assets after year-end distribution reaching 40% of all assets, equity investment balance not exceeding 40% of the enterprise’s net assets, etc.

(3) The enterprise’s corporate governance norms, organizational structure is simple and clear, and shareholders and beneficiaries are structurally transparent. The enterprise should be a group company or in the structure of a corporate group or a holding company. It must report or disclose the group's shareholding structure, actual controller, beneficiary and its changes, including anonymity and share-holding entrustment.

(4) The enterprise is with financial professionals and standard management ability.

2. An enterprise may not become a controlling shareholder of a financial institution if it has one of the following circumstances:

(1) The enterprise gets away from its main business and blindly expands into the financial industry.

(2) The enterprise’s risk control is weak.

(3) The enterprise makes highly leveraged investments.

(4) There are many affiliated enterprises and the equity relationship is complex and opaque.

(5) The enterprise’s associated transactions are frequent and abnormal.

(6) The enterprise abuses market monopoly position or technological advantage to develop unfair competition, manipulate the market and disrupt financial order.

III. Comparative Analysis of Shareholder Conditions among Commercial banks, Insurance Companies and Securities Companies

At the beginning of 2018, in order to regulate the equity management of commercial banks, insurance companies and securities companies, China Banking Regulatory Commission (abolished), China Insurance Regulatory Commission (abolished) and CSRC have successively issued Provisional Measures on Administration of Equities of Commercial Banks, Administrative Measures on Equity of Insurance Companies and Administrative Measures on Equity of Securities Companies (Consultation Draft). Commercial banks, insurance companies and securities companies, as the main financial institutions in China, are related to the national economy and the people's livelihood, and the financial market’s stability and prosperity. There are some differences in equity management among the above mentioned financial institutions.

Equity management of commercial banks, insurance companies and securities companies does not distinguish between shareholders of financial enterprises and shareholders of non-financial enterprises. Commercial banks mainly regulate shareholders who hold more than 5% of shares, and insurance companies and securities companies regulate all shareholders who hold shares. Insurance companies and securities companies also regulate the relevant qualification requirements of shareholders of each shareholding ratio.

V. Conclusion

On the whole, although commercial banks, insurance companies and securities companies have some differences in the provisions on equity management, they generally comply with the basic principles and relevant norms of the Guiding Opinions, such as shareholder qualifications, shareholding structure, investment funds, corporate governance, related party transactions and risk isolation between industry and finance. Administrative Measures on Equity of Securities Companies (Consultation Draft) is still in the consultation stage, the Insurance Funds Management Team of Beijing DOCVIT Law Firm will keep track of the implementation of this provision and conduct relevant interpretations.