The China Securities Regulatory Commission (CSRC) has introduced a set of new rules for the country’s private equity industry to strengthen the supervision and to crack down on illegal activities.
“Since the CSRC included private equity funds under supervision in 2013, China’s private equity industry has maintained rapid development,” said the regulator in a release. The market has managed to retain its growth “despite an economic downturn, as well as both internal and external headwinds.”
According to official statistics from the CSRC, there were 24,600 registered fund managers and 96,800 registered private equity funds in China with 15.97 trillion yuan ($2.5 trillion) in total assets under management (AUM) by the end of 2020.
“The industry plays an important role in promoting the formation of social capital, lifting the proportion of direct financing, advancing technological innovation, optimising investor structure in the capital market, and helping develop the real economy, among other aspects,” said the CSRC.
However, the regulator continued, “industry risks are gradually emerging.”
Under the set of 14 new rules, fund managers are explicitly forbidden from using private equity funds as vehicles for public fundraising or any other disguised forms of public fundraising. Such funds shall only be offered to qualified investors.
The rules require fund managers to properly label their private equity funds and to specify the scopes of their businesses, while restraining their fundraising efforts through Tencent’s social networking app WeChat, or any media and other public channels.
Fund managers are prohibited from using fund assets for investment activities not related to private equity, such as to obtain or guarantee loans. The mixing, pooling or misappropriation of PE funds is also strictly forbidden.
The rules stipulate fund managers to build robust internal control and risk management systems and good internal governance, and to disclose their capital structures, income distribution, expense arrangements, related party transactions, and entrusted third-party institutions, among other information.
The finalised rules have taken effect immediately after its introduction on January 8, 2021.