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Q&A on the Provisions for the Administration of Equity Ownership in Securities Companies


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  I. What are the main changes to the earlier Consultation Paper reflected in the final draft of the Provisions for the Administration of Equity Ownership in Securities Companies (the Provisions hereinafter)?

  The CSRC has taken in useful feedback from the earlier public consultation and made the following main changes in the final draft of the Provisions.

  First, clarifying the categorization of securities companies. Based on the risk profile and complexity of a securities company’s business model, the Provisions categorizes securities companies into two designations: the specialized securities companies and the comprehensive securities companies. The specialized securities companies refer to those engaging in traditional securities-related businesses, such as brokerage, securities investment consultancy, financial advisory service, securities underwriting and sponsoring, and proprietary securities tradings. The nature of their business centers on intermediary activities as an agency without incurring heavy burdens of debts on their own accounts or matchmaking for large capitals, exhibiting low levels of externalities. Therefore, compliance of their major shareholders and controlling shareholders with the basic conditions set forth in the Securities Law and the Provisions for the Supervision and Administration of Securities Companies would suffice. In contrast, the comprehensive securities companies refer to those taking leveraged positions on their own accounts and exposed to overlapping risks across multiple businesses. In addition to traditional securities-related undertakings, these companies generally also participate in complex and highly capital-consuming operations that are closely intertwined with other sectors of the financial system, such as market making for stock options, OTC derivatives trading, stock pledge and repurchase. Due to the significant externalities in their business model, the major shareholders and controlling shareholders of comprehensive securities companies must have competent management controls and the ability to replenish capital in time of need. Adopting a differentiated regulatory approach will be conducive to supporting the development of securities companies commensurate with their own strengths and characteristics.

  Second, lowering the requirements on the assets size and operating revenue for the controlling shareholders and major shareholders of a comprehensive securities company. In the Provisions, quantitative benchmarks have been modified to accentuate professional capabilities and risk management expertise. For controlling shareholders of a comprehensive securities company, the requirement on assets size is finalized as “total assets of no less than RMB50 billion, net assets of no less than RMB20 billion”, while other requirements such as “controlling shareholders” revenue from core business in the latest three years of no less than RMB100 billion” and “major shareholders’ operating revenue in the latest three years of no less than RMB50 billion” have been removed.

  Third, adjusting the equity ownership limit for a non-financial enterprise to hold equities in a securities company. In order to promote balanced equity ownership, strengthen corporate governance, and straighten the order of financial investment activities by non-financial enterprises, it was proposed in the earlier Consultation Paper that “one non-financial enterprise can have de facto control over no more than 1/3 equities of a securities company”. With full considerations of public feedback on this matter, the final draft of the Provisions has adjusted the above equity ownership limit to 50% in principle.

  II. Is the categorization as “specialized” or “comprehensive” interchangeable?

  The CSRC encourages diversity of specialties and expertise among securities companies to better serve the real economy, the market and their clients. The development paths of their choice shall be differentiated and adapted to their business strategies and risk control capabilities. On one hand, a specialized securities company, on the condition that its controlling shareholders and major shareholders are in compliance with the qualifications specified in the Provisions, can apply for licenses for new and complex operations and be reclassified as a “comprehensive securities company”. On the other hand, a comprehensive securities company can also change its scope of business to serve its strategic objectives after fulfilling due approval procedures and be reclassified as a “specialized securities company”.

  III. To which securities companies is the Provisions applicable?

  The Provisions is applicable to all securities companies in the Chinese mainland with equal binding force on the ones incorporated before and after its release, and on the domestic-funded ones and foreign-invested ones.

  IV. Since the Provisions has set new requirements for the controlling shareholders of comprehensive securities companies, what transitional arrangements are available to existing securities companies?

  With full considerations of the market realities, the CSRC also concurrently released the Supplemental Provisions for the implementation of the Provisions for the Administration of Equity Ownership in Securities Companies (the Supplemental Provisions hereinafter) to smooth in the Provisions. The Supplemental Provisions prescribes a 5-year grace period for a securities company which fits in the definition of “comprehensive” but has not met all the requirements in the Provisions for its controlling shareholders. Failure to achieve full compliance at the expiry of the transition term will not affect the aforesaid company’s operations in traditional securities-related business, such as securities brokerage, securities investment consultancy, securities underwriting and sponsoring. But operations in high-risk businesses, such as OTC derivatives trading and market making for stock options, must be closed, which means that it shall restructure into a specialized securities company.

  V. Together with the release of the Provisions, the CSRC also announced resuming establishment approval review for domestic-funded securities companies. When will establishment applications be accepted?

  Resuming the establishment approval review for domestic-funded securities companies is in line with the holistic opening-up of the markets to both domestic and foreign institutions. The CSRC will update associated service guides for administrative licensing in due course. Eligible entities can submit establishment applications to the CSRC in accordance with the Provisions, Supplementary Provisions and associated service guides. As highly professional financial institutions, securities companies should be at the helm of competent controlling shareholders and major shareholders who have sufficient financial experience and risk management expertise. The CSRC will hold a strict line in the approval review in accordance with laws and regulations.

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Regulator Information

Abbreviation: CSRC
Jurisdiction: China

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