Professional Interpretation

Abstract: Notice of the China Insurance Regulatory Commission on the Establishment of Equity Investment Schemes with Insurance Funds (Insur. Cap. [2017]No. 282) (hereinafter refer to as No. 282), which was issued on January 5, 2018, prohibits insurance asset management institution from conducting channel business, nor invest such schemes in private equity investment funds in which other asset management products are embedded.

I. definition of equity investment scheme

First, No. 282 is the first official document to define “equity investment scheme”. Pursuant to the Article 1 of No. 282: “An equity investment scheme shall refer to a financial instrument that meets the following requirements: it is initiated and set up by an insurance asset management institution as the manager, and is placed under the custody of a custodian; it raises funds from investors, and invests and manages the funds raised; and, it directly or indirectly invests in the equities of unlisted enterprises.”

The main difference between the equity investment scheme and what usual is referred to private equity investment is equity investment scheme is initiated and set up by an insurance asset management, whose capital resource is insurance capital while private equity investment collects capital from private investors. Under China system, the insurance-related investment activity is under supervision of China Insurance Regulatory Commission (which will be combine with China Banking Regulatory Commission soon) while private equity investment is under supervision of China Securities Regulatory Commission.

II. Clarification of the investment scope to propel the service for real economy

According to Article 2, “An equity investment scheme shall invest in the equities of unlisted enterprises or the units of private equity investment funds that are in line with the directions of State macro policies and meet the requirements of regulatory policies.” Meanwhile, Article 7 prescribes that: “An insurance asset management institution shall go through registration with the institution designated by the CIRC if it intends to establish an equity investment scheme. The institution designated by the CIRC shall register, on a priority basis, equity investment schemes that intend to invest in major national development strategies, major reform initiatives, key fields, major construction projects and real economy projects”.

For the purpose of serving real economy, the regulatory institution’s support equity investment scheme. As for the debts investment, the attitude of regulatory institution in rather vague. It has been mentioned in the No.282 that debts investment in disguise by equity investment is forbidden.

III. back to the origin of “equity investment”

As prescribe in the Article 3 of No. 282, “The investment returns obtained by an equity investment scheme shall be pegged to the operating performance of an unlisted enterprise, or the investment returns of a private equity investment fund, invested by the said scheme.”  At the same time, No. 282 specifically listed the methods shall not be undertook by equity investment scheme such as “(1) Specifying clear expected returns, and paying fixed annual investment returns to investors on a regular basis; (2) Specifying that the investment principal shall be redeemed by the invested enterprise or an affiliated third party upon maturity or mandatorily; or (3) Any other circumstances determined by the China Insurance Regulatory Commission ("CIRC").”

Actually the Article 3 means to emphasize on the characteristics of equity investment scheme, so to distinguish equity investment from debt investment and make the equity investment scheme to be accord with the origin concept. Consequently, the classic transaction model being frequently used, which is making debts investment under the guise of equity investment, is illegal from now on.  

On one hand, take the short-term view, Mezzanine capital investment businesses would be adversely affected by such regulations. However, on the other hand and take a long-term view, it has positive effect on preventing increasing local debt in disguise form and lowering to overall financing leverage.

IV. Underline the active management, prohibit channel business

Article 4 of No. 282 showed, “An insurance asset management institution that has established equity investment schemes shall assume the duties of proactive management, and shall neither conduct channel business (i.e. using equity investment schemes solely as fund-raising channels) directly or in disguise, nor invest such schemes in private equity investment funds in which other asset management products are embedded.”

Other than that, to enhance the active management, the article 6 prescribe that “An insurance asset management institution that has established equity investment schemes shall have in place full-time business positions, be staffed with sufficient personnel, and earnestly strengthen the management of the entire business process, to guard against investment risks.” Combined with the requirements of Interim Provisions on the Administration of Infrastructure Debt Investment Plans and Notice of the China Insurance Regulatory Commission on Strengthening Asset Management Competency Building, the staff requirement for insurance asset management institution is as below:

For investment management, legal compliance, assets appraisal, credit rating, risk management, accounting and auditing shall be not less than 20. Specifically, the number of staff that have over three years’ experience in project investment and credit management shall be not less than eight; the number of managers above the middle level that have over five years’ experience in project investment and credit management and relevant professional qualifications shall be not less than four; the number of staff that have over five years’ experience in credit rating shall be not less than three; and the number of debt investment plan risk managers shall be not less than three.

V. to designate the upper limit of investment in private equity.

In Article 5 of No.282, “Where an equity investment scheme invests in a private equity investment fund, the amount invested shall not exceed 80% of the amount actually raised by the said fund.” The purpose of this regulation is to avoid too much investment in the same private fund so that to lower the risk.

VI. Conclusion

In conclusion, the issuance of No. 282 further clarifies the equity investment scheme, and shows the direction for investment to equity of unlisted company so to encourage the insurance capital to serve real economy better.

However, to be noticed that insurance capital imposes a higher requirement for the mobility and security on investment. In previous practice, the insurance asset management institutions balance security and mobility by use of embedded or channeled fund. Since current NO.282 illegalized the above method, the conflicts between security and mobility would become obvious, which forces insurance capital investment scheme to readjust and readapt. Back to the origin and serving for real economy is the trend of future finance. Form the long-term view, insurance capital Management Company should be prepared for the new requirement and challenge.