New regulations have opened up A-shares of Chinese companies to foreign investors.The “Measures for Strategic Investment by Foreign Investors upon Listed Companies” (the “Measures”), came into effect 31 January 2006, and they have the effect of creating a new range of deal possibilities for the 1,400 A-share firms listed on the local stock exchanges. The "Measures" were jointly published by the Ministry of Commerce (MOFCOM), the China Securities Regulatory Commission (CSRC), the State Administration of Foreign Exchange (SAFE), the State Administration of Industry and Commerce (SAIC) and the State Administration of Taxation (SAT).

The “Measures” are significant because they permits foreign investors to buy A-shares in both listed local companies which have completed shareholding reform, as well as in newly-listed firms.  Previously, only domestic investors and overseas institutional investors who were Qualified Foreign Institutional Investors (QFII) could buy shares on the A-share market (Shanghai and Shenzhen) up to a maximum of 10% in a single company, though foreign investors could buy strategic stakes in listed local companies by purchasing non-tradeable shares.

Pursuant to the “Measures”, Foreign Investors shall conform to the following requirements:(1) Must be foreign legal persons or other organizations set and operated lawfully, with stable finances, sound credit and experienced management;(2)The total amount of real assets held abroad shall not be less than USD0.1 billion or the total amount of real assets under supervision no less than USD 0.5 billion; or the total amount possessed by its parent company no less than USD0.1 billion, or the total amount of real assets under supervision no less than USD 0.5 billion;(3) Must have wholesome governance structure, sound inner control systems, and standardized operation;(4) Must be free from penalties from supervisory authorities in other countries for at least three years (including its parent company).

Under the “Measures”，the following circumstances shall be met for investors to conduct strategic investment: (1) To acquire A-shares of listed company by means of contract transfer, regular, issuance of new shares by listed company or otherwise prescribed by national laws and rules; (2) Investment may be conducted in stages, with the proportion of shares obtained after the initial investment of not less than 10% of the shares issued by the company, except according to special provisions for special industries, or with approval from appropriate authorities; (3) A-shares obtained by listed company shall not be transferred within three years; (4) As for the industries with specific provisions on share proportion of foreign investors, shares held by the above-mentioned investors shall be in accordance with the related provisions; as for the regions prohibited from foreign investment, investors shall not invest in the above-mentioned regions; (5) Investment related to state shareholders of listed companies be in accordance with the related provisions on state asset management.

Strategic investment conducted through new shares being introduced by listed companies shall be undertaken in accordance with the following procedures: (1) Resolution on new shares being introduced by the board of directors of the listed company to investors shall be in place, as well as the appropriate revisions to the articles of association; (2) Resolution on new shares introduced by corporate shareholders of the listed company to investors and on revision of the articles of association; (3) Introduction contract signed by the listed company and investor(s); (4) Application documents submitted by the listed company to the Ministry of Commerce, special provisions prevail when available; (5) Upon receipt of the approval from the Ministry of Commerce on strategic investment by investors, the listed company shall submit the introduction application documents to the China Securities Regulatory Commission and subsequently obtain their approval; (6) The listed company, after the completion of introduction, shall receive the approval certificate of foreign invested enterprises by the Ministry of Commerce, and register the change in share holdings with the appropriate administrative authorities of industry and commerce.

Strategic investment by means of contract transfer shall be handled in accordance with the following procedures: (1) Resolution of strategic investment by board of directors of the listed company via investors and by means of contract transfer; (2) Stock transfer contract signed by the transferor and the investor; (3) Related application documents submitted by the investor to the Ministry of Commerce, special provisions prevail when available; (4) The investor with shares in the listed company, after having received the above-mentioned approvals, shall handle confirmation procedures of stock transfer in the concerned stock exchange, conduct registration transfer procedures in securities registration and clearing institutions and submit them to China Securities Regulatory Commission for filing and record keeping; (5) The listed company, after the completion of contract transfer, shall obtain from the Ministry of Commerce an approval certificate of foreign-invested enterprise, and register the change in share holdings with the appropriate administrative authorities of industry and commerce.

Based on the “Measures”, documents that need to be provided to the Ministry of Commerce are: (1) Strategic investment application;(2) Description of the strategic investment project (3) Introduction contract or share transfer agreement; (4) Position paper of recommendation institutions or legal letter; (5) Commitment letter of continued shareholding by investors; (6) Certificate that the investor did not suffer severe penalty from domestic or foreign authorities; (7) Registration certificate with lawful notarization and certification for the investor, identity certificate of the legal person (or authorized representative); (8) Certified audited balance sheet of the investor covering the most recent three years; (9) The documents to be submitted in accordance with the provisions in items 1, 2, 3, 5 and 6 shall receive the approval from the legal representative of the investor or the signature from its authorized representative.For the latter, confirmation signed by the legal representative and related notarization and certification is required; (10) Any other documents requested by the Ministry of Commerce. The Chinese original version of the above-mentioned documents shall be submitted, except that the original version and the Chinese translation of the documents listed in item (7) and item (8) shall be submitted.Within 30 days of receipt of all of the above-mentioned documents, the Ministry of Commerce shall provide its official reply, the duration of validity of which is 180 days.

Approximately RMB2.1 trillion (US$259 billion) in non-tradeable A-shares were tied up in listed companies (roughly two-thirds of the country's total market capitalisation) into tradeable A-shares. Many of these non-tradeable shares are held by the state. The Chinese government hopes that foreign acquisitions of reformed or new A-shares can add momentum to the local stock market.  The conversion process began in earnest in August 2005, and now more than 300 listed firms have completed (or have begun) the share restructuring. The newly-floated tradeable A-shares are called G-shares. A-share listed companies selling at least 25% of their stock to foreign investors qualify as FIEs, benefiting from the preferential treatment that comes with FIE status.

The “Measures” will be welcomed by foreign companies seeking strategic investments in the A-shares of listed companies, since they offer an alternative route to QFIIs, which are of limited use to strategic investors wishing to take significant stakes.  As of the end of December 2005, QFIIs had investment quotas totalling US$4 billion - a figure which will be raised to US$10 billion in 2006.  While QFIIs are best suited to investment managers, the Measures are designed to attract acquisitions by foreign companies looking to make longer-term strategic investments in A-share companies, the end result of which the government hopes will be to promote better governance within listed companies.

── Angela Yao