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China’s Opening-Up - Measures for the administration of equities of insurance companies

19.07.2018 Insurance

Fei Mao

Fei Mao Partner

Measures for the Administration of Equities of Insurance Companies (“2018 Measures”) was published on 2 March 2018 and took effect on 10 April 2018.

2018 Measures are part of the measures implementing China’s proposed reforms to its financial sectors. It replaces Measures for the Administration of Equities of Insurance Companies (2014 revised) (“2014 Measures”)“, introduces significant changes to the way insurance companies are administered by the regulatory authority, and gives effect to proposed reform that foreign investments in the insurance sector are governed by the same rules as the Chinese investments.

For foreign investors who are considering investing in China in the insurance sector, the following key changes introduced by 2018 Measures are the matters they shall be aware of in order to make a successful investment in China.  

Classification of Shareholders of Insurance Companies

2018 Measures classify the shareholders of insurance companies into four categories based on the amount of the shareholding: -

1.  Finance Class I Shareholders – the shareholders holding less than 5% of the shares.

2.  Finance Class II Shareholders – the shareholders holding 5% or more, but less than 15%, of the shares.

3.  Strategic Shareholders – the shareholders holding 15% or more, but less than 1/3, of the share, or the shareholders whose voting rights are sufficient to make a significant impact on the shareholders’ resolutions made at the shareholders’ general meetings.

4.  Controlling Shareholders – the shareholders holding 1/3 or more of the shares, or the shareholders whose voting rights are sufficient to make a decisive impact on the shareholders’ resolutions made at the shareholders’ general meetings.

Eligibility of Investors

2018 Measures provide for different conditions to be met by different types of shareholders.

To be a Strategic Shareholder, potential investors must meet the following conditions:-

1)  All conditions that need to be met by Class 1 and Class 2 Shareholders;

2)  It has an ability to continuously make capital contributions, and has made profits in the last three consecutive fiscal years;

3)  It has net assets of no less than RMB 1 billion;

4)  Its amount of equity investment shall not exceed the net assets;

5)  Other conditions as set out by laws, administrative regulations, and the CBIRC.

To be a Controlling Shareholder, potential investors must meet the following conditions:-

1)  All conditions that need to be met by Class 1, Class 2, and Strategic Shareholders;

2)  It has total assets of no less than RMB10 billion;

3)  It has net assets at the end of the most recent year no less than 30% of total assets;

4)  Other conditions as set out by laws, administrative regulations, and the CBIRC.

Restrictions on Shareholding

1.  Cap on a single shareholder’s shareholding

2018 Measure provides that a single shareholder can only own up to 1/3 of the insurance companies’ registered capital. “A single shareholder” means a shareholder, its affiliates and parties acting in concert. So the cap of 1/3 on shareholding applies to the total shareholding of a shareholder, its affiliates and parties acting in concert.

Such cap applies to domestic shareholders as well as foreign shareholders. There is, however, an exception to this cap. Where an insurance company set up, or acquire shares in, an insurance company, due to “business innovation or the need of specialised or group operation”, its capital contribution or shareholding in the target insurance company is not subject to the cap.

2.  Cap on foreign shareholders’ collective shareholding

For non-life insurance companies, there is no restriction on foreign ownership in the company. Foreign shareholders can collectively own up to 100% of the companies’ shares.  

For life insurance companies, foreign shareholders can own up to 51% of the company’s shares.  Such cap will be completely removed in 2021.

3.  Restrictions on the number of insurance companies invested

An investor, its affiliates and parties acting in concert may only become the Controlling Shareholder of one insurance company carrying out the same type of business. An investor that is an insurance company shall not establish another insurance company of the same business type.  

An investor, its affiliates and parties acting in concert shall not become the Controlling Shareholder and the Strategic Shareholder of more than two insurance companies.

Restrictions on Transfer of Equities

2018 Measures provide for the following restrictions on share transfers by shareholders: -

1)  Controlling Shareholders shall not transfer any shares they hold within five years of becoming a Controlling Shareholder;

2)  Strategic Shareholders shall not transfer any shares they hold within three years of becoming a Strategic Shareholder,

3) Finance Class II Shareholders shall not transfer any shares they hold within two years of becoming a Finance Class II Shareholder

4)  Finance Class I Shareholders shall not transfer any shares they hold within one year of becoming a Finance Class I Shareholder

The above restrictions do not apply to transfer of shares between different entities under the control of a same controller.          

“Negative Lists”

To regulate the market access to Chinese insurance companies more effectively, 2018 Measures provide for three “Negative Lists”: -

1)  The Negative List of circumstances, which, if any potential investors fall under, would prevent them from becoming the shareholders of insurance companies;

2)  The Negative List of circumstances, which, if any potential investors fall under, would prevent them from becoming the Controlling Shareholders of insurance companies;

3)  The Negative List of the types of funds, which potential investors should not use to acquire shares in the insurance companies.

The above are some of the key changes introduced by the 2018 Measures. Potential investors need to be aware of these key rules and carefully navigate their investments in China.  

Article authors:

Fei Mao