China Specifies Lock-up Period for RMB Qualified Foreign Institutional Investors
Mar. 25 – With the aim to better facilitate the implementation of the pilot program for domestic securities investments by RMB qualified foreign institutional investors (RQFII Pilot Program), China’s State Administration of Foreign Exchange (SAFE) released the “Circular on Issues Concerning the RQFII Pilot Program (hereinafter referred to as the ‘Circular’)” on March 11, 2013, which specifies the lock-up period for the investment principal. Detailed information can be found below.
According to the Circular, the investment quotas for open-ended funds shall be calculated on the outstanding balance, which means that an open-ended fund can repatriate the investment principal without reducing its quota, but the net amount of the investment principal remitted into China shall not exceed the investment quota approved by the SAFE.
Outside of open-ended funds, the investment quotas for other products or funds of RQFIIs shall be calculated based on the actual amounts incurred, meaning the cumulative amount of funds remitted inward shall not exceed the investment quota approved by the SAFE.
The investment principal of products or funds of RQFIIs (excluding the open-ended funds), shall be remitted to the designated account within six months since the date of approval, and the lock-up period for such principal is one year.
The lock-up period of the investment principal, which refers to the period of prohibiting a RQFII from remitting principal abroad, starts on the date when the principal has been fully remitted into the account, or six months after the investment quota has been approved if the principal has not been remitted in full.
The Circular also requires RQFIIs not to transfer or resell their investment quota to other institutions or individuals. For a RQFII that has obtained the investment quota but fails to effectively utilize such quota within one year since the date of approval, its investment quota may be reduced or cancelled by the SAFE.
RQFIIs who violate the relevant regulations and make remittances exceeding the amount of the investment principal into China, may be imposed a fine of not more than 30 percent of the amount of the illegal remittance, or a fine of more than 30 percent (but less than 100 percent) of the amount of the illegal remittance under serious circumstances.
On March 6, 2013, China’s Securities Regulatory Commission issued the “Measures for the RMB Qualified Foreign Institutional Investor (RQFII) Pilot Program (Decree No.90 of CSRC, hereinafter referred to as ‘Measures’),” which regulates the securities investment activities of RQFIIs in Mainland China. Detailed information can be found below.
According to the Measures, to make securities investments in Mainland China, a RQFII shall entrust a mainland commercial bank with asset custody, and entrust mainland securities companies with securities trading.
- China’s Securities Regulatory Commission (CSRC): Conducting supervision and administration over the securities investment in Mainland China by RQFIIs
- The People’s Bank of China (PBOC): Managing the opening of RMB bank accounts by RQFIIs in Mainland China
- The State Administration of Foreign Exchange (SAFE): Managing the investment quotas of RQFIIs
- PBOC, together with the SAFE: Monitoring and managing the capital inflow and outflow of RQFIIs
An institutional investor wishing to obtain RQFII qualifications shall satisfy the following conditions:
- It shall be in stable financial condition and have a good credit standing, and its place of registration and business qualifications shall meet the requirements of the CSRC
- It shall have an effective corporate governance and internal control system, and its relevant professionals shall hold relevant practicing qualifications required by their respective countries or regions
- It shall operate in compliance with the applicable provisions and have not previously been subject to any material penalty by local regulatory authorities since its establishment or in the last three years
- It shall satisfy other requirements of the CSRC in accordance with the principle of prudent regulation
The CSRC will review applications filed by RQFIIs for the business qualification of securities investment in Mainland China, and make a decision within 60 days upon receipt of all the required application material.
A RQFII that has obtained the business qualification for securities investment in Mainland China shall apply to the SAFE for investment quotas.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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