Investment regulation - China - Part 1
Holding restrictions / Qualified Foreign Institutional Investor (QFII) limits
The Stock Exchange monitors both the 10% individual limit and the 30% aggregate shareholding limit.
If a QFIIa exceeds the 10% limit, the Stock Exchange will notify the QFII’s domestic broker and custodian and request it to arrange the sale of the excess shares within five business days.
When the QFII’s aggregate holdings in a stock reaches 26%, this will be announced on the stock exchange’s web site and reissued on a daily basis until the limit falls below 26%.
When the 30% limit is exceeded, the Stock Exchange will notify, on a last-buy, first-sell basis, the broker and custodian of the last buying QFII. This (first) QFII must sell the excess holdings within five business days so that the holding falls below the 30% limit. If, during this period, the holding falls below 30% due to sales by another QFII, the first QFII will no longer be required to sell the shares.
On 26 May 2017, the China Securities Regulatory Commission (CSRC) issued the revised rules (CSRC  No.9) for controlling shareholders and shareholders holding shares of 5% or above (referred as “substantial shareholders” thereafter), listed companies’ directors, supervisors and senior executives, and other shareholders who are reducing the holdings of preIPO shares and nonpublic offering of a listed company on reducing holdings.
On 27 May 2017, Shanghai Stock Exchange and Shenzhen Stock Exchange also released relevant implementation details (“Stock Exchange Implementation Details”). If the shareholders are not a substantial shareholder but hold preIPO shares or non-public offering shares of a listed company, then the total number of shares to be reduced by these shareholders through collective bidding system within three months should not exceed 1% of the total shares of the listed company; whereas if the share reduction is through block trading system, the total number of shares to be reduced cannot exceed 2% of the total shares of the listed company within any consecutive 90 days, and the transferee cannot further transfer the shares within six months of acquiring the shares.
Further, on 12 January 2018, Shanghai Stock Exchange and Shenzhen Stock Exchange issued a Q&A to clarify the Stock Exchange Implementation Details.
In addition, on 5 January 2018, China Banking Regulatory Commission (CBRC) promulgated the Provisional Measures on Administration of Commercial Banks Shareholding (hereinafter referred to as “Provisional Measures”), which set out the following additional shareholding reporting requirements for investor and its affiliates and concerted parties who acquire shareholding of commercial banks:
- The investor and its affiliates and concerted parties, individually or jointly, for the first-time planning to hold or to increase shareholding to reach 5% (or more) of the capital/issued shares of a commercial bank, must obtain the preapproval from the CBRC or a local branch of the CBRC. In the case that 5% (or more) of the shareholding is acquired through the onshore/offshore securities market, the validity of the approval is six months.
- The investor and its affiliates and concerted parties, individually or jointly, holding 1% to 5% of the capital/issued shares of a commercial bank, must report to the CBRC or a local branch of the CBRC within ten business days of acquiring the shareholding. The detailed requirements and process of the report must follow the relevant CBRC rules.
- The shareholding held by the investor and its affiliate and concerted parties must be aggregated when making calculation of shareholding percentage.
- A single investor and its affiliate and concerted parties can only be the substantial shareholder (for example holding 5% (or more) shareholding) of no more than two commercial banks or can only be the controlling shareholder of one commercial bank.
For issued shares of a listed company and issued amount of convertible bonds of a listed company, the thresholds are as follows:
- 5% or more of issued shares of a listed company;
- 20% or more of total issued amount of convertible bonds issued by a listed company.
The Substantial Shareholder Report Entity (SSRE) (QFII and Non-QFII) must submit a report to CSRC, to the Stock Exchange and to the listed company. It must also make an announcement to the general public. The report must include the following:
- Name and domicile of the SSRE;
- Name of the listed company, security type and quantity;
- The change in the number of shares held or controlled by the SSRE;
- How the changes in the shareholding were effected (that is, through securities trading, a contractual share transfer, an administrative allocation, a court ruling etc.);
- All transactions in the shares of the listed company conducted by the SSRE over the previous six months;
- Other information as required by the CSRC and stock exchanges.
Foreign investors and concerted parties
A foreign investor (that is, a QFII eligible for A-share market investments and a non-QFII eligible for B-share market investments) and their “concerted party” that become a Substantial Shareholder Report Entity (SSRE) is responsible for reporting any substantial share holdings.
Investors that have “concerted actions” in the shareholding movements of the listed companies are "concerted parties". If one of the following situation applies it is deemed as "concerted party":
- Investor has shareholding controlling relations with another investor.
- Investors are controlled by the same entity.
- The director, supervisor or key member of the senior management of the investor is acting as the director, supervisor or senior management of another investor.
- The investor holds shares of another investor and is influential in its major decision making.
- The institution or organisation other than a bank, or a natural person who provides financing to the investor in assisting the investor's acquisition of listed company's shares.
- The investors have an economic benefit relationship with each other, such as a partnership, cooperation, joint operation etc.
- An individual holding more than 30% of the shares of the investor has a shareholding of the same listed company as the investor.
- The director, supervisor or senior management of the investor has shareholding of the same listed company as the investor.
- A related party (parents, spouse, children and their spouses, parents-in-law and their spouses etc.) of the person/entity mentioned in 7 and 8 has shareholding of the same listed company as the investor.
- The director, supervisor or senior management of a listed company, including their related party, has shareholding of the investor; or their directly/indirectly controlled entity has shareholding of the investor.
- The director, supervisor, senior management, and employee of the listed company or its controlling entity/organisation have shareholding of the investor.
- The investors have another affiliated relationship.
Procedures for reporting shareholdings
Where the SSRE’s holdings and/or controlled holdings reach or exceed, for the first time, 5% of the issued shares of a listed company.
The SSRE shall, within three working days from the date the shareholding reached or exceeded the limit, submit the appropriate report and make the public announcement. During the three-day period, the SSRE must not purchase or sell shares of that company.
Where the SSRE has acquired and/or controlled 5% or more of the shares issued by a listed company designated in Scenario 1A, and has subsequently increased the actual/controlled shareholding by another 5% of the shares issued by the same listed company.
The SSRE shall submit the report and make a public announcement within three working days from the date the reporting threshold was reached. During the reporting period and for two days after the public announcement, the SSRE may not purchase or sell shares of that company.
Where the SSRE expects to acquire or control more than 5% of the issued shares of a listed company through non-trade transfers such as a contractual share transfer, an administrative allocation, a court ruling or any other legal means other than transfers of shares conducted on the stock exchanges.
The SSRE must submit the report and make a public announcement before the date on which the shareholding is expected. If the SSRE fails to make a public announcement, it must not purchase or sell shares of that company.
Where the SSRE has acquired and/or controls more than 5% of the shares issued by a listed company as mentioned under Scenario 2A, and expects the subsequent actual/controlled shareholding to exceed another 5% of the shares of that company through non-trade transfers such as a contractual share transfer, an administrative allocation, a court ruling or any legal means other than transfers of shares conducted on the stock exchanges.
The SSRE must submit the report and make a public announcement before the date on which the change to the shareholding is expected. During the reporting period, and for two days after the announcement, the SSRE must not purchase or sell shares of that company.
Where the SSRE reaches a 5% reporting limit and subsequently decreases its holding by a percentage that is less than 5% resulting in its overall holding to fall below 5%.
The SSRE must make a public announcement within three working days of the date that the shareholding reached this limit.
Where the SSRE performs one of the following actions:
The SSRE, within two working days of the occurrence of the action must make a public announcement but does not need to submit a report.
For scenarios 1A and 1B, the shareholding changes result from stock exchange trades and are treated differently from the other shareholding changes.
For scenarios 2A and 2B, the SSRE shall also announce the registration of the share transfer within two working days of the registration. Since the actual/controlled shareholding change would result from a contractual share transfer, administrative allocation, court ruling or other legal means and involve an agreement and/or other forms of documentation that enable the shareholding change, the report and announcement should be made within three days of the date shown on the above documentation but before the change occurs.
Convertible bond shareholding reporting
As promulgated in the Regulations of Listing of Convertible Bonds on the Shanghai and Shenzhen stock exchanges, an investor must, within three days, file a report to the stock exchanges, and to the listed company and make a public announcement, as follows:
When an investor’s holding of convertible bonds reaches or exceeds 20% of the total convertible bonds issued by a listed company or when an investor’s holding of convertible bonds reaches or exceeds 20% of the total convertible bonds issued by a listed company and the holding subsequently changes by another 10% of the convertible bonds issued by the same listed company, the investor must not, during the reporting period and within two days after the reporting period and making the public announcement, buy either convertible bonds or shares of that company.
The report to the stock exchange and the public announcement shall contain the following information:
- The holder’s name, domicile, main business and business status;
- Name and quantity of the convertible bonds;
- Percentage of the convertible bonds held or the date that the holding reached the stipulated 10%;
- Quantity of the convertible bonds co-owned by a convertible bond holder and his affiliate and the start holding date;
- Other information required by the CSRC.
The securities market is not freely open to foreign investors.
- A-shares1 (listed on the stock exchange, excluding domestically listed foreign shares), Treasury bonds listed on the stock exchange, convertible and corporate bonds listed on the stock exchange, open and close-end funds, LOF, ETF, warrants and other financial instruments approved by CSRC are only available for QFIIs;
- B-shares are available for foreign investors who have obtained an Investor Code. Settlement versus payment of B-shares is conducted in HKD (Shenzhen Stock Exchange) and USD (Shanghai Stock Exchange).
Investors in B-shares must obtain an investor code from CSDCC Shanghai and/or Shenzhen branch respectively before trading. The investor code is unique and allocated to each foreign investor. Securities institutions, such as custodian banks and authorised broker firms may act on behalf of overseas individuals and institutional investors by obtaining a B-share investor code.
1. According to the latest CSRC rules, residents from Hong Kong, Macau and Taiwan are, from 2013, eligible to invest in the A-share market.