Overseas bourses now allowed representative offices on mainland

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Aug. 31 – As the China Securities Regulatory Commission announced earlier this year, foreign stock exchanges are now able set up representative offices to promote their organizations and conduct research on the mainland.

The Measures for the Administration of Foreign Stock Exchanges’ Representative Office in China, which came into effect July 1, permits overseas bourses to set up representative offices (ROs), establishes the procedures for set-up and approval of foreign stock exchange ROs, and places restrictions on the types of marketing activities those ROs can utilize.

Foreign stock exchanges are permitted to establish only one RO in China, and must meet certain requirements in order to qualify for establishment. The overseas bourse is required to be from a country or region that has comprehensive, established laws and regulations pertaining to financial supervision. The stock exchange in question shall be in stable condition and have been in existence for a minimum of twenty years. Furthermore, the financial supervisiory authority in the home country is required to conclude a memorandum of understanding on supervisory coordination with the CSRC.

Any foreign bourse that wishes to establish an RO must apply to the CSRC, which then will issue an approval certificate to those applicants that qualify. The order makes no provisions for approval processing time. Should the RO be approved, it is required to establish a physical location and complete all necessary industrial and commercial registrations, as well as tax registrations within 90 days, providing the CSRC with proof that all registrations have been completed. Additionally, at least 50 percent of the RO’s staff must be Chinese.

The chief representative of the RO is required to have a “good understanding” of the finance laws and regulations in China; a minimum of a bachelor’s degree and ten years of experience in finance or economics; and three years of experience in China-related business within the five years prior to RO establishment. It is not clear how it will be determined whether the chief representative meets these requirements.

Any major changes to the RO after its establishment, including name change, change of chief representative, or cancellation, are subject to CSRC approval. The change of office – relocation, enlargement or reduction of the former office – can take place only inside the city where the RO is located and must be reported (no approval needed) to the CSRC in written form within five days from the start of alteration.

The order also contains regulations limiting the types of promotional activities the RO may participate in. The RO or any of its staff members are prohibited from conducting any form of advertisements, commercial or promotional activities directed towards individuals. The RO is permitted to conduct market promotion activities directed at enterprises, but is required to first report its intentions to the CSRC; should no objection be raised by the CSRC within ten days, the RO may proceed with its planned promotional activities.

The RO is required to make three annual reports to the CSRC comprised of a work report, a report on Chinese companies listed on the stock exchange and Chinese funded members of the stock exchange, and a report on the stock exchange itself. The RO is also required to report to the CSRC if the foreign stock exchange undergoes changes that severely affect its business or if it imposes financial penalties on any listed Chinese company.

The CSRC will make regular and/or random inspections of the RO to ensure it is adhering to the regulations on promotional activities and providing the required reports. Violation of regulations or failure to make timely reports may result in warnings, confiscation of illegal income, or even revocation of representative office status.

For business advisory services, assistance establishing, structuring or operating a business and contract drafting in Beijing, please contact Sabrina Zhang in the Beijing office of Dezan Shira & Associates, tel. [10] 6510 2288.

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