China's private equity industry will be placed under official supervision after the National Development and Reform Commission last week set out requirements on fundraising activities, information disclosure and an expanded PE manager filing system that will cover the entire industry.
The circular requires PE funds to file with regulatory bodies within one month of completing their business registration. Funds with asset of more than Rmb500 million ($78.5 million) must file with the NDRC, while the rest come under the remit of regulatory bodies specified by provincial governments.
Those PE funds and trustees established before the release of the circular should file with governing regulatory bodies within three months.
The filing system previously only applied to large PE funds managing mandates from heavyweight asset owners, such as the National Council for Social Security Fund, while the vast majority of PE funds are not regulated. Shanghai-based consultancy Z-Ben Advisors sees the expansion of this filing system as the first step towards regulating the PE business in China.
The circular also requires PE managers not only to disclose information regarding fund operations to investors, but also provide annual reports to regulatory bodies within four months of the end of the financial year. Major events occurring during the investment process must also be disclosed to the regulator.
NDRC also stipulates that PE funds’ fundraising activities should be carried out privately and targeted at qualified investors who have the capability to identify and tolerate risks. PE managers cannot directly promote the funds through advertising, public seminars or forums, or through indirect marketing by placing prospectuses on counters at banks, securities companies and trust companies.
The circular specifies that PE funds should be invested in line with China’s industrial policy, investment guidelines and macro control policies. Idle funds can only be deposited in commercial banks or invested in fixed-income products such as government bonds.
The regulatory bodies are required to conduct an annual inspection within five months of the end of the financial year to ensure the PE funds and trustees are following the rules.
Though the circular is only an administrative notification, Z-Ben says this is the start of China’s efforts to build a universal framework regulating PE activities. There are still some ambiguities to be addressed, adds the firm, such as the coordination among NDRC, provincial governments, the Ministry of Commerce and the China Securities Regulatory Commission.
"As some provincial or municipal governments are aggressive in pushing PE business and intend on granting favourable policies to PE managers filed with them, such as the QFLP programme," adds Z-Ben, "this may, to a certain extent, impact NDRC’s efforts in creating a unified regulatory framework.”