Revision seeks to halt illegal fundraising, insider trading

Venture capital and private equity fund managers have welcomed a draft amendment to the Law on Securities Investment Funds, aimed at protecting investors' interests and reducing financial risks by imposing new regulations on privately offered funds.

A second review of the amendment started on Tuesday at the opening session of the bimonthly meeting of the National People's Congress Standing Committee. The first review was in June.

The draft document specifies regulations for private equity funds, including its contracts, investment scope and rules for fund managers.

The revision is aimed at preventing illegal fundraising activities and insider trading.

Detailed rules for the managers of privately offered funds will be also introduced by the China Securities Regulatory Commission, according to the draft document.

The draft amendment said that the managers of privately offered funds should register with the fund industry association, and that the association should report private equity funds that meet a certain scale to the CSRC.

"We're glad that the private equity sector will be under increased supervision for a healthy and steady development of the sector, and we do hope that the CSRC will introduce detailed rules based on the market," said Liu Gang, general manager of the North China Region at Shenzhen Capital Group, a Chinese leading equity investment firm.

Liu said that he hopes the privately offered fund sector doesn't become the target of excessive regulations — as was the case for public funds — which might prevent the introduction of new financial products and lead to a lackluster performance.

"We hope that the fundraising and investment activities of private equity funds can be made according to the market. Investors can then choose fund managers with sound investment records," Liu said.

Other players in the sector would like to see more input from the industry.

"We think that the industry association should play a more positive role in the private equity sector. We'll keep a close eye on the detailed rules to be made by the CSRC for fund managers of privately offered funds," Yi Jigang, president of Orient Jiyi Investment, a Beijing-based private equity firm, told China Daily.

The venture capital and private equity sector has been developing rapidly in China. There were more than 10,000 venture capital and private equity firms at the end of 2011 managing nearly 2 trillion yuan ($317.5 billion) in total assets, according to Liu Jianjun, director of the financial affairs division of the CSRC's Department of Fiscal and Financial Affairs.

"Private equity investment is good for companies to raise money and for the nation to reform its economy," said Liu. "But there has been some illegal fundraising."

Government authorities in Tianjin said in August 2011 that a fraudulent equity investment firm called Huolimu Equity Investment Fund had illegally raised about 1.6 billion yuan from more than 5,000 people around China. The money could not be recovered.

And previously, according to media reports, two other equity investment firms — Tiankai Xinsheng Equity Investment Fund in Tianjin and Well & Well Group in Shanghai — also defrauded investors.

(Beijing) – The country's legislature has reviewed a draft amendment to the Law on Securities Investment Funds that would broaden its application to domestic private equity funds.

The amendment was reviewed by the NPC's Standing Committee the second time on October 24, after public consultation which followed its first reading in June.

Despite rapid development over the past few years, the PE funds industry still has no unified national law or regulation governing it.

The Law on Securities Investment Funds was introduced in 2004 when equity investments in unlisted companies were rare. It does not cover PE and venture capital investment funds.

Administrative control over PE funds has been in the hands of the nation's top economic planner, the National Development and Reform Commission, since 2005. That year, it co-drafted with nine other central government departments an interim policy to prop up high-tech startup companies by developing venture capital investment institutions to help them finance.

It has rolled out two more policies since last year to consolidate its authority over the PE funds business by imposing a mandatory requirement on all equity investment enterprises to file with NDRC or a designated provincial authority.

The China Securities Regulatory Commission, on the other hand, is said to be vying for control over the business, on the grounds that PE investments are more closely tied to securities investment in listed companies than to national economic policies.

Some legislators back the argument. Macro-economic policymakers should focus on the holistic picture of national development and refrain from interfering with regulations on a micro level, Wu Xiaoling, deputy director of the Financial and Economic Affairs Committee under the NPC, said at the amendment's second review.

There were also worries that the draft had avoided addressing a complicated issue about which regulatory body's command prevails if a conflict arises.

Other concerns debated at the review included punishment to rule breakers and whether there should be restrictions on regulatory officials working in companies they supervised.

The draft proposes punishing those responsible for a transgression with an administrative warning on top of a fine ranging from 30,000 to 300,000 yuan.

Some legislators said the warning should be replaced by barring the violator from executive positions in the business for five years.

"A warning is too light a punishment to impose any real deterring effect," NPC delegate Jin Shuoren said. "It is vitally important to strengthen industrial disciplines by revoking the transgressors' executive qualification."

Separately, delegate Fang Xin said the amendment should have another provision to defend the integrity of regulatory agencies by preventing individual regulators from working in companies they supervised for a period of time.

The PE funds industry has experienced explosive development recently. Last year alone, a record 230 PE funds sprang up, raising more than 252 billion yuan, up 40 percent from the previous year, said Dai Xianglong, chairman of the country's largest institutional investor, the National Council for Social Security Fund.