On 29 December 2016, the China Insurance Regulatory Commission (“CIRC“) commenced public consultation on the amended Administrative Measures for Equities of Insurance Companies (Draft for comments) (the “Draft Measures“), setting out a new regulatory regime for investment in Chinese insurance companies.
Lowered Maximum Shareholding Percentage
The market sees the Draft Measures as CIRC’s reaction to the series of acquisitions of major listed insurance companies in the secondary market since 2015, which are widely reported in the media and viewed critically by the regulator in terms of the identity of the purchasers (being often from outside the industry) and their intention for such acquisitions (suspected as using the listed insurance company as their own financing platform). In light of this, CIRC has changed the limit on the shareholding by a single shareholder in a Chinese insurance company from the current 51% (for those having satisfied certain requirements, including acting as shareholders of an insurance company for at least three years and being approved by CIRC) to one-third, subject to certain exceptions. The limit on the maximum shareholding percentage continues to apply to the aggregated equity interest held by related parties.
New categorization, respective qualification and restrictions for shareholders
The Draft Measures divide shareholders of an insurance company into the following three categories:
- Financial shareholders: with a shareholding percentage of less than 10% and no major influence on the operation of the insurance company;
- Strategic shareholders:
- with a shareholding percentage between 10% and 20% in the insurance company; or
- with less than 10% equity interest but having the ability to exert important influence on the operation and management of the insurance company; and
- Controlling shareholders:
- with a shareholding percentage of more than 20% in the insurance company and a major influence on the operation of the insurance company; or
- with less than 20% equity interest but having the ability to exert controlling influence on the operation and management of the insurance company.
The Draft Measures also set out qualification requirements for each of the above mentioned three shareholder categories, which are in essence similar to those under the currently effective rules. For the controlling shareholders, the Draft Measures further set out that “one investor can only act as the controlling shareholder of one insurance company with the same type of business operation” (subject to exceptions approved by CIRC). The scope of “same type of business operation” is not entirely clear and it is hoped that it will be clarified in the final version of the rules.
Similar to the 3-year lock-up imposed by existing rules on a shareholder holding more than 20% equity interest in an insurance company, controlling shareholders are subject to a 3-year lock-up under the Draft Measures. In addition, the Draft Measures prohibit financial shareholders and strategic shareholders from transferring their equity interests for a 2-year or 1-year period respectively from the date of acquisition of such equity interests. Although the original text of the Draft Measures refers to the starting date of such period as the “establishment date of the insurance company”, we are of the view that CIRC’s original intention is to have the relevant lock-up period start from the relevant shareholder’s actual acquisition of such equity interest and hope the final version of the rules will clarify this point. There are some exceptions to these lock-up rules, including for intra-group transactions.
Permitted funds for acquiring interests in an insurance company
The Draft Measures remove the current requirement that investors must only use their own funds to acquire equity interests in insurance companies, which enables investors to invest in insurance companies through debt financing or other sources. However, at the same time, the Draft Measures also provide a “negative list” of funds which cannot be used directly or indirectly to acquire equity interests in insurance companies, such as loans related to insurance companies and funds acquired against a pledge of deposits or other assets of insurance companies.
No substantial change to the regulatory regime for foreign investors
Other than with regard to the requirements mentioned above, the Draft Measures do not substantially change the qualification requirements currently imposed on foreign investors by the existing rules.