CBL’s Introduction
Qualified Foreign Limited Partnerships in Beijing operate under a model that is governed by restrictive rules. Under the procedures, fund managers are reviewed up front, funds are restricted by approved limits and permitted uses, and custodian banks are obligated to monitor the fund’s cash flows and report problems. Enforcement of suspected violations is immediate, and can involve both capital freezes and suspension of fund activities.

These rules show that regulators deliberately misled potential investors in one small way about the nature of these funds in order to make them more comfortable with putting money in, because the rules explicitly deny in the fine print that this “Limited Partnership” means “limited partnership.” Investors should therefore

CBL’s American English translation of the procedures outlines exactly what foreign investors need to know to stay compliant.

Contents

• Ch. 1 Qualified Foreign Limited Partner and Coordinated Review Process
• Ch. 2 Pilot Fund and Management Entity
• Ch. 3 Pilot Project Operations
• Ch. 4 Oversight and Administration

Beijing Qualified Foreign Limited Partnerships – Temporary Procedures

Chapter 1 General Principles

Section 1 These procedures are made under applicable law with the purpose to implement the directive and plan of the CPC Central Committee and State Council to pursue service industry liberalization, facilitate financial industry internationalization, expand the use of foreign investment, stimulate the equity investment market, and improve innovation in the science, technology, and finance industries in Beijing.

Section 2 Qualified foreign limited partner means a foreign individual or institutional investor that subscribes to a pilot fund established under these Procedures.

Pilot fund management company means a business entity that is authorized by members of the Pilot Project Coordinated Review Office to establish a pilot fund and manage investments in Beijing pursuant to law.

Pilot fund means one or more private equity investment funds that are established by a pilot fund management company in Beijing pursuant to law, with investment from a qualified foreign limited partner, that privately raises funds. The pilot fund management company and the pilot fund are referred generally to as a pilot fund.

Section 3 The pilot project shall establish a coordinated review process for pilot projects at the direction of the appropriate national agencies. The members of the coordinated review office include Beijing Financial Regulation Department, Beijing Market Oversight Department, People’s Bank of China Beijing Office, and State Administration of Foreign Exchange Beijing Office. The appropriate agencies shall direct the coordinated review process. The Beijing Financial Regulation Department shall host the coordinated review office.

Beijing Financial Regulation Department, as the Pilot Project Coordinated Review Office, shall be responsible for the ongoing, day-to-day operation, administration, and risk management of pilot projects; shall process pilot business applications its documentation, and organize reviews by other members of the coordinated review office. Beijing Market Oversight Department shall direct interagency cooperation for pilot project business filings. The People’s Bank of China Beijing Office and State Administration of Foreign Exchange Beijing Office shall regulate the foreign exchange declaration, account establishment, foreign exchange transactions, and Renminbi cross-border transactions under these Procedures. Members of the Pilot Project Coordinated Review Office shall be responsible for the ongoing of pilot projects within their jurisdiction.

Chapter 2 Pilot Project Applications

Section 4 A pilot fund management entity is either a Chinese owned pilot fund management entity or foreign owned pilot fund management entity.

A pilot fund may be organized as either a company or partnership. A pilot fund may be organized through an agreement alone without an entity structure.

Section 5 A private equity fund management company, its controlling shareholder, ultimate beneficiary, or managing partner may submit an application to the Pilot Project Coordinated Review Office to become a pilot fund.

Section 6 The Pilot Project Coordinated Review Office upon receipt of complete pilot business applications shall determine whether to process it; if deciding to process, shall solicit comments from the members of the coordinated review office, arrange for a coordinated review meeting to review the application, and the members of coordinated review office shall send a delegate to attend the meeting with written approval. The Pilot Project Coordinated Review Office shall issue a written approval to an eligible applicant, stating the funding limit, and submit a report on the matter to the Beijing Government.

Section 7 A pilot fund management entity shall be:
(a) The controlling shareholder, ultimate beneficiary or managing partner of a private equity fund management entity, which must be a financial business that is approved by the jurisdictional oversight agency and has a certification from the agency, or a fund management entity with a fund size of at least 100 million RMB or the equivalent in foreign currency.

(b) A private equity fund management entity or its shareholders must have effective governance and internal controls, and have not been penalized by a justice agency or regulator within the past three years.

(c) A private equity fund management entity shall employ at least two executives who have good personal credit history and over three years of experience in equity investment or management.

(d) A private equity fund management entity that is in continued existence, shall file with the China Securities Investment Fund Association, if required by applicable law if required to file with file with the China Securities Investment Fund Association.

(e) Other requirements from the members of coordinated review office.

Section 8 The Pilot Fund shall:

(a) have at least 100 million RMB (or the equivalent in foreign currency). A private pilot fund management entity may subscribe to a certain percentage of fund shares.

(b) Other requirements from the members of coordinated review office.

Section 9 A qualified limited partner of the pilot fund shall:

(a) Be an institution or individual with capability to recognize and take on risk, who has appropriate investment experience.

(b) Be an institutional investor that has effective governance and internal controls, and has not been penalized by a justice agency or jurisdictional regulator within the past three years; an offshore institutional investor shall have at least 5 million USD equivalent currency in net assets, and invest at least 1 million USD equivalent currency in each transaction; and a domestic institutional investor shall have at least 10 million RMB in net assets, and invest at least 1 million RMB in each transaction.

(c) Domestic or offshore individual investors shall have at least 3 million RMB assets and at least 5 million RMB net worth or at least 0.5 million RMB average annual income over preceding three years, and shall invest at least 1 million RMB in each transaction.

(d) Other conditions imposed by the members of coordinated review office.

Chapter 3 Pilot Project Operations

Section 10 A pilot business shall designate an incorporated bank approved by a cabinet-level bank and insurance industry regulatory agency and having custodian qualifications, a level 2 Regional Banking Division bank in Beijing or its parent bank as the custodian bank. The custodian bank oversees the investments, the custodian account and its use of funds.

Section 11 A newly established pilot business shall register with the Beijing business regulatory agency, providing the coordinated review office’s written approval and funding limit. A pilot business shall register and file with the Asset Management Association of China, if applicable law requires filing with the Asset Management Association of China.

Section 12 A pilot fund management company shall not raise foreign capital for each fund in excess of the funding limit approved by the coordinated review office. Unless otherwise provided, the fund management company may distribute foreign capital among multiple funds.

Section 13 The pilot fund may do foreign exchange settlement with the custodian bank complying with applicable regulations on foreign exchange and:

(a) A custodian bank shall be appointed to each pilot fund. The custodian bank shall maintain separate accounting records for pilot fund investments and submit regular fund flow statements to the Pilot Project Coordinated Review Office, with copies to the appropriate agencies.

(b) Pilot fund investments shall comply with the fund contract, articles of formation or articles of incorporation, or partnership agreement, and shall comply with Chinese industrial policies and the current Special Administrative Regulations for Admission of Foreign Investments.

Section 14 Foreign capital raised by the pilot fund shall only be used to invest in:

(a) Private company equity.

(b) Common stock of public companies acquired through private transactions (including private placement of new shares, block trades, and privately negotiated transactions), preferred stock convertible into preferred stock, and debt-to-equity swaps and debt securities convertible into common stock, including participation in share allotments by existing shareholders of public companies.

(c) Mezzanine financing, private placement bonds, and non-performing assets.

(d) Domestic private equity funds.

(e) Other transactions permitted under applicable law.

Domestic pilot fund investments shall comply with the current Foreign Investment Admission Administrative Procedures. Specific investment requirements issued by the China Securities Regulatory Commission or the Asset Management Association of China shall control. Pilot funds shall not use raised capital for offshore investments outside of China unless authorized.

Section 15 Foreign capital raised by a pilot fund shall comply with rules issued by local regulatory agencies. Domestic capital raised shall comply with applicable Chinese law. The pilot fund may distribute profits or liquidate and distribute the proceeds pursuant to the fund contract, articles of formation or articles of incorporation, or the partnership agreement. All international distributions shall comply with applicable national foreign exchange regulations.

Chapter 4 Oversight and Administration

Section 16 The coordinated review agencies shall oversee and administer pilot projects to the extent of their authority.

Section 17 A pilot fund management company shall submit regular reports disclosing the company’s business operations (including foreign exchange and investment income), custodial account statements from custodian banks, annual financial statements audited by a certified public accountant, and quarterly reports on material investment activities to the Pilot Project Coordinated Review Office, with copies to the appropriate agencies.

Section 18 The custodian bank shall comply with applicable international balance of payments reporting requirements pursuant to law and shall retain complete records of pilot company account income and expenditures for a period of 20 years for inspection by the appropriate agencies.

The custodian bank shall monitor the use of funds in pilot company custody accounts, verify the authenticity of those transactions and compliance with applicable jurisdictional agency investment requirements, and immediately report any suspected violations to the Pilot Project Coordinated Review Office and appropriate coordinated review agencies.

The custodian bank shall submit quarterly reports on each pilot company’s offshore income and expenditures and foreign exchange transactions to the Pilot Project Coordinated Review Office, with copies to the appropriate agencies.

Section 19 If a Chinese pilot fund management company or custodian bank violates these procedures, the Pilot Project Coordinated Review Office and coordinated review agencies shall do a regulatory compliance interview with the entity and order corrective action, or suspend the entity from pilot project activities and impose liability pursuant to law based on the severity of the violation.

Chapter 5 Miscellaneous

Section 20 Investors from the Hong Kong Special Administrative Region, Macao Special Administrative Region, and Taiwan that participate in pilot funds as limited partners shall be treated as foreign investors. Their investment in or establishment of private equity funds and pilot fund management companies in Beijing shall be governed by these Procedures.

Section 21 These Procedures shall take effect upon issuance. The Pilot Project Coordinated Review Office shall coordinate and address any issues arising during implementation together with the appropriate agencies.

******************

See CBL’s China Employment & Labor Law FAQ to learn more

This article was translated to American English from the following government publication:

“关于本市开展合格境外有限合伙人试点的暂行办法”

https://www.beijing.gov.cn/zhengce/gfxwj/sj/202105/t20210506_2382005.html