Issuing Body: Tianjin Municipal Commission for Development and Reform, Tianjin Municipal People's Government Financial Service Office, Tianjin Municipal Administration for Industry and Commerce, Tianjin Municipal Commission of Commerce, Tianjin Municipal Financial Bureau
Issuing Date: July 11, 2011
Effective Date: September 1, 2011
Five key government agencies in the rapidly growing municipality of Tianjin have combined to raise capital thresholds and increase supervision of equity investment enterprises. Those agencies, which include local counterparts of the State Administration for Industry and Commerce and Ministry of Commerce, issued the Measures for the Administration of Equity Investment Enterprises and Equity Investment Management Entities in Tianjin (Tianjin Equity Investment Measures) on July 11, 2011. Tianjin, Beijing, and Shanghai have all stepped in to regulate China's private equity and private equity management enterprises while the country awaits the release of nationwide rules by the National Development and Reform Commission (NDRC).
The investment of private equity (PE) funds in non-listed companies is a relatively new concept in China, having developed in just the last ten years. As China's knowledge of and experience with private equity has grown—chiefly because of the role played by PE in the development of high-tech companies—the Chinese government has decided to help develop the industry and has authorized the NDRC to draft the country's first national regulations governing PE firms and PE management entities. But those rules have not yet been released, and in the absence of nationwide rules, some local governments have issued regional regulations in an effort to promote development of PE firms—and to compete with each other for status as a private equity hub in China.
The Tianjin Equity Investment Measures replace the Tentative Measures for the Administration of Registration and Filing of Equity Investment Funds and Equity Investment Fund Management Companies, which were issued in November 2008 (2008 Tianjin Regulations). The new measures took effect on September 1, 2011.
Definition and Scope of Application
Only entities approved under the Tianjin Equity Investment Measures may call themselves Equity Investment Enterprises or Equity Investment Management Entities in Tianjin.
The Tianjin Equity Investment Measures permit equity investment enterprises to invest in non-public companies and privately placed stocks of public companies. They are also allowed to provide related consulting services. The measures thus allow equity investment enterprises to engage in a somewhat broader scope of business (including privately placed stocks) than traditional PE funds.
The Tianjin Equity Investment Measures limit what equity investment enterprises may do with unused capital. Unused capital must be deposited in a bank or used to purchase a fixed-return investment product such as treasury bonds.
Equity investment management entities are permitted by the Tianjin Equity Investment Measures to manage equity investment enterprises, especially their investment activities, and may provide certain consulting services.
The Tianjin Equity Investment Measures do not have separate rules or requirements for foreign-invested equity investment enterprises and foreign-invested equity investment management entities, so they must meet the same thresholds, adhere to the same requirements, and receive the same supervision as their domestic counterparts. The new measures make the local Commission of Commerce and Administration of Industry and Commerce responsible for approving and registering foreign-invested equity investment enterprises and foreign-invested equity investment management entities, but they do not provide detailed procedures or list documents required for approval.
This equal treatment of foreign-invested equity investment enterprises and equity investment management entities by the Tianjin Equity Investment Measures contrasts with the approach taken by Beijing and Shanghai, both of which have different rules for foreign and domestic firms. Despite this equal treatment, however, the Tianjin measures, which focus on the supervision of equity investment and equity investment management enterprises after they are established, leave important questions unanswered. Since the measures do not contain procedures for the establishment of foreign-invested PE enterprises, those enterprises may encounter obstacles, such as foreign exchange issues, when attempting to make downstream investments in China.
In contrast, by providing specific rules for foreign-invested PE firms, Beijing's and Shanghai's rules have introduced trial policies that are intended to attract global PE giants.
Legal Forms and Capital Thresholds
The Tianjin Equity Investment Measures specify that both equity investment enterprises and equity investment management entities may be established in the form of a corporation or a partnership. For corporations, the number for shareholders is subject to China's Company Law, with no more than 50 shareholders allowed for limited liability companies and 200 for joint-stock companies. Partnerships may have at most 50 partners.
With respect to capital requirements, the Tianjin Equity Investment Measures substantially increase the thresholds over those contained in the 2008 Tianjin Regulations. For an equity investment enterprise established as either a corporation or partnership, the minimum registered or committed capital is RMB100 million, ten times higher than the previous requirement. This registered capital may be contributed in installments, with the first such installment of RMB20 million, for a corporation, to be paid within three months after it is established. For partnerships, the new measures do not specify the contribution schedule for the first installment (RMB10 million), as it is usually negotiated and agreed upon among partners. Additionally, as PE firms generally target "qualified investors" with a certain level of capital strength and risk management capability, the Tianjin Equity Investment Measures specify that each institutional investor should contribute at least RMB10 million, while each individual must contribute a minimum of RMB2 million. Individuals must also provide a certificate that they actually own the RMB2 million.
For equity investment management entities, the Tianjin Equity Investment Measures only require that at least RMB2 million be contributed as a first installment. The Tianjin Equity Investment Measures are silent on the minimum registered capital for management enterprises.
Early this year, the NDRC issued the Circular on Further Standardizing the Development and Filing Management Work of Equity Investment Enterprises in Pilot Areas, which was intended to support the filing of equity investment enterprises in six pilot areas, including Tianjin. (Beijing, Shanghai, Zhejiang Province, Jiangsu Province, and Hubei Province were the other pilot areas.) In order to implement the NDRC's filing notice, the Tianjin Equity Investment Measures specify, equity investment enterprises established in Tianjin with over RMB500 million or the equivalent in foreign currency should apply for the NDRC filing through the NDRC's Tianjin counterpart, the Tianjin Development and Reform Commission.
Equity investment enterprises with capital between RMB100 million and RMB500 million should apply for filing at the Tianjin Municipal Filing Office (Filing Office), which consists of ten governmental agencies, including the Tianjin Development and Reform Commission and the Tianjin counterpart of the Ministry of Commerce. The paid-in capital for such equity investment enterprises should be no less than RMB20 million, while the paid-in capital for an equity investment management entity should not be less than RMB2 million at the filing date. For equity investment enterprises filing at the Filing Office level, their management entities should file at the same time.
After receiving an application, the Filing Office will examine it and decide whether to accept the filing. This filing is a precondition for taking advantage of favorable policies and subsidies from the local government, including preferential tax rates, rent subsidies, and rewards for senior management.
Beginning in 2012, equity investment enterprises are required to submit their annual business reports and audited financial reports to the Filing Office by April. Equity investment management entities should file annual asset management reports, also within the first four months of the year.
The main purpose of the Tianjin Equity Investment Measures is to implement the filing requirements contained in the NDRC's Circular on Further Standardizing the Development and Filing Management Work of Equity Investment Enterprises in Pilot Areas. The new measures will also enable the Tianjin government to better monitor the activities of both existing and newly established equity investment enterprises and equity investment management entities. This greater oversight and the significantly higher capital thresholds are also expected to combat the illegal raising of money under the guise of private equity.
PE firms, however—particularly foreign PE firms—are likely most interested in the procedures and requirements for them to set up shop in Tianjin. Given the gaps that exist in the Tianjin Equity Investment Measures, we expect the Tianjin government to issue implementing rules in the near future to provide a better roadmap for equity investment enterprises and equity investment management entities.