Chinese Regulation on Private Equity Industry
Chinese Regulation on Private Equity Industry (published on ALB)
I. Development of Private Equity Industry in China
Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. Although the legal structure might be the same more or less, there are many classifications within the equity fund due to the difference of investment style and the investment target. Such classification might cause confusions sometimes. An internationally accepted classification divide private equity fund into three categories: a. venture capital fund which targets at the start-ups or the hi-tech companies; b. Growth-oriented Fund, which targets at the enterprises at the growth period without being listed as a non-controlling shareholder; c. Buyout Fund, which targets at the private equity of the mature enterprise with an intent of control in order to restructure the resources of the targeted enterprise and increase the value thereof.
Private equity fund is in the limelight of the capital market recently. Even a new word “Private Equiteer” was created to describe the private equity investors. Worldwide, private equity funds manage approximately $1 trillion of capital. Private equity fund is an emerging market in China. It develops very fast in the year 2006. According to the studies of AVCJ, there are more than 350 private equity funds targeting Chinese market with a total 12.4 billion US dollars. Having said that, there are lots of things needed to be done to improve the legal environment of private equity market.
The definition of the private equity fund in China is much more confused reflecting a Chinese element. Different from developed countries, the Chinese government is playing an important role to regulate and control the private equity fund. The Chinese government intends to divide the private equity fund into three forms: venture capital fund, infrastructure fund and enterprises restructuring fund. While the venture capital fund is regulated by the Interim Measures for the Administration of Startup Investment Enterprises which was officially promulgated in November 15, 2005 and took effect in March 1, 2006, the other two types of private equity fund will be regulated by another regulation, named Measures for Administration of Industry Investment Fund which is still under draft by National Development and Reform Commission (NDRC). According to current version of draft, NDRC will keep a close eye on the operation of the Industry Fund.
II. Several Important Issues
Virtually all private equity funds are organized as limited partnerships, with private equity firms serving as the general partner (GP) of the funds, and large institutional investors and wealthy individuals providing the bulk of the capital as limited partners (LPs). In China, the situation is more complicated than that in the following: a. Chinese legal environment of private equity fund is far from behind and large foreign equity fund usually elects to establish their presence abroad and invest the domestic enterprise through FDI or the typical “Sina Model”; b. the Chinese government is having a tight control of the market and the overwhelming majority of the private equity funds are those with strong government background; c. there are no limited liability partnerships and enterprise or organizations are not allowed as the partner of the partnership. The new Partnership Enterprise Law of the People’s Republic of China which was officially promulgated in August 27, 2006 and will be effective on June 1, 2007 will break through the aforementioned limitations.
The legal systems of private equity market is under construction which will be regulated the Company Law, the Law of the People's Republic of China on the Promotion of Small and Medium-sized Enterprises, the Partnership Enterprise Law of the People's Republic of China, the Interim Measures for the Administration of Startup Investment Enterprises, the Provisions Concerning the Administration of Foreign-funded Business-starting Investment Enterprises plus other tax regulations including the newly promulgated tax preferential treatment on startup investment enterprises.
A. Entry Threshold
Within current Chinese legal system plus the ongoing Industry Investment Fund regulation which is under discussion, there are broadly three forms of private equity fund in China, namely, a. start-up investment enterprise as a limited liability partnership, b. start-up investment enterprise as a limited liability company; c. industry investment fund.
1. Start-up Investment Enterprise as Limited Liability Partnership
Apparently the number of partners shall not exceed 50 although the Interim Measures for the Administration of Startup Investment Enterprises allow a number not exceeding 200 because the former law has a prevailing power. For a foreign funded limited liability partnership, the minimum capital contribution is 10 million US dollars. There should be at least one GLP which is called indispensable investor. The accumulative total capital managed by it in the three years before the application is not less than 100,000,000 U.S. dollars, and of which no less than 50,000,000 U.S. dollars have been used in business-starting investment.
2. Start-up Investment Enterprise as a Limited Liability Company
As a limited liability company, the number of shareholders shall not exceed 50. For a foreign funded limited liability company, the minimum capital contribution is 5 million US dollars. An indispensable investor of a foreign-funded incorporated Start-up Investment Enterprise shall subscribe to and actually pay not less than 30% of the subscribed contributions and the actual total contributions respectively
3. Industry Investment Fund
As the regulation on Industry Investment Fund is not officially promulgated, it is still unclear the threshold therefor. However, the regulation of Industry Investment Fund is similar to the regulation on securities mutual fund.
B. Tax Treatment
1. Start-up Investment Enterprise as a Limited Liability Company
On February 15, the Ministry of Finance and State General Administration of Taxation jointly issued the Notice regarding the Tax Policy to Facilitate the Development of Start-up Investment Enterprise (the "2007 Notice"). According to the 2007 Notice, 70% of the investment amount on the small and medium-sized high-tech enterprise can be deducted from taxable income subject to a few conditions such as that the investment shall have lasted for at least two years. According to the new Enterprise Income Law which will take effect in 2008, the deductible tax will be 17.5% of the investment amount (25% as uniform tax rate). According to the Notice on Some Issues Concerning the Income Tax Related to Equity issued in June 21, 2000 (the "2000 Notice"), in case the shareholders of the Start-up Investment Enterprise is still an enterprise, then the shareholders will also be entitled to non-payment of taxes which will avoid the double taxation. However, in case the shareholders are individuals, they shall pay 20% of the income obtained from the Start-up Investment Enterprise.
2. Start-up Investment Enterprise as Limited Liability Partnership
According to the 2007 Notice, whether the Start-up Investment Enterprise as Limited Liability Partnership will also enjoy the tax preferential treatment is not very clear. According to the new Partnership Enterprise Law, for the production and business operation incomes and other incomes of a partnership enterprise, the partners shall pay their respective income tax in accordance with the relevant tax provisions of the state. Therefore it seems that the investors shall pay the income tax in full amount without deduction. However, according to Notice of the State Administration of Taxation on Relevant Issues Concerning the Payment of Enterprise Income Taxes by Foreign-Funded Start-up Companies issued in June 4, 2003 (the “2003 Notice”), for a foreign funded start-up enterprise which is restructured as a non-legal person, the enterprise income tax returns may be filed and the enterprise income tax may be paid either by the investing parties respectively or uniformly by the start-up enterprise after being approved by the local taxation organ in accordance with the Tax Law. In such case, the foreign funded Start-up Investment Enterprise as Limited Liability Partnership might enjoy the preferential tax treatment under the 2007 Notice. Anyway, it seems that the Chinese government is encouraging the Start-up Investment Enterprise as a Limited Liability Company.
C.. Protection on Investors
Usually, the investor shall have such following rights, among others: right of first refusal, tag-along rights, drag-along rights, pre-emptive rights, anti-dilution right, conversion right, redemption right, registration right. According to our experience, what the investor care about the most are two folds: a. the right to control the change of equity of the invested company; b. the right of initial public offering (IPO) as the most important exit mechanism. With the aforementioned rights vested in the investor, the founders can not easily get away with the investor later on once they accept the investment because the private equity fund will allocate a much higher PE rate to the invested enterprise which can only be usually accepted by the private equity funds. Naturally the second-round investor will defer to the opinion of the first investor to a much extent. Chinese capital market has fallen far behind the developed countries without offering the sufficient exit mechanism to the investor. The good news is that Chinese capital market including the stock exchange market is growing fast. We expect Chinese private equity market will play an important role in Chinese fast-growing economics.
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中国私募股权行业的管理规定
（发表于ALB）
1.中国私募股权行业的发展状况
私募股权（PE）是一个意义很宽广的词，它是指任何类型对资产的股权投资，该股权不是在在公开股票市场上自由交易的。尽管法律结构基本相同，但是私募股权基金依据投资风格和投资目标的不同可以分为许多不同的类型。这种分类有时会造成混乱。一种国际上公认的分类方法是将私募股权基金划分为三种类型：ａ．以创业企业或高科技公司为投资目标的创投基金；ｂ．成长型基金，作为非控股股东以处于成长期还未上市的企业为投资目标；ｃ．并购基金，以成熟期企业的非公开交易股权为投资目标，，目的是控股投资的企业，对其进行资源重组，实现资产增值。 私募股权基金成为近期资本市场令人瞩目的焦点。甚至创造出一个叫“Private Equiteer（私募股权者）”的新词以称呼私募股权投资人。在全世界范围，私募股权基金管理着大约1万亿美元的资本。在中国，私募股权基金是一个新兴的市场，它在2006年发展非常迅速。亚洲创业投资期刊（AVCJ）的研究表明，有350多支私募股权基金以中国市场为投资目标，这些基金管理着总共124亿美元的资金。尽管如此，中国私募股权市场的法律环境仍然是亟需改善的。 在中国，私募股权基金的定义加入了中国元素后更加令人迷惑。与发达国家不同，中国政府在监管和调控私募股权基金时发挥着更加重要的作用。中国政府倾向于将私募股权基金划分为三种形式：创业风险投资基金；基础设施投资基金和企业重组基金。创业风险投资基金由 2005年11月15日正式颁布，于2006年3月1日生效的《创业投资企业管理暂行办法》管理，其它两种形式的基金将由国家发改委正在起草的《产业投资基金管理办法》管理。根据目前版本的草案，国家发改委将密切关注产业基金的运行。 2. 几个重要问题 几乎所有的私募股权基金都是以有限合伙人制设立的，基金管理公司作为普通合伙人（GP），大的机构投资者和富有的个人作为有限合伙人（LP）提供大量资金。在中国，情况比这个更为复杂，表现在：ａ．中国私募股权基金的法律环境十分落后，大型的国外私募股权基金通常选择在国外设立办公室，通过外资直接投资（FDI）或典型的“新浪模式”投资于国内企业；ｂ．中国政府对市场实施紧密的控制，并且绝大多数的私募股权基金都是有很强政府背景的；ｃ．还没有有限责任制合伙企业（limited liability partnerships, LLP）的商业形式，不允许止企业或组织成为合伙企业中的合伙人。新的《中华人民共和国合伙企业法》于2006年8月27日正式颁布，并将于2007年6月1日生效，这将突破上述的限制。 私募股权市场的法律体系正在建设中。这个法律体系包括《公司法》、《中华人民共和国中小企业促进法》、《中华人民共和国合伙企业法》、《创业投资企业管理暂行办法》、《外商投资创业投资企业管理规定》、以及其他的税务法规包括近期出台的创业投资企业税收优惠政策。 A． 进入门槛 在中国目前的法律体系内，以及仍在讨论制订中的《产业投资基金管理办法》，在中国有大致三种形式的私募股权基金，即：ａ．有限责任合伙人制（limited liability partnerships, LLP）的创业投资企业；ｂ．有限责任公司制的创业投资企业；ｃ．产业投资基金。 1）有限责任合伙人制的创业投资企业 显然，合伙人的数量不得超过50名，尽管《创业投资企业暂行管理办法》允许不超过200的合伙人，因为规定50名的法律更有主导权。对于外商投资的有限责任合伙人制企业（limited liability partnership, LLP），最低的注册资本额为1000万美元。至少有一个“普通责任合伙人”（General Liability Partner），即必备投资者（indispensable investors）。申请前三年累计管理的总资本不得少于1亿美元，其中至少5000万美元用于创业投资。 2）有限责任公司制的创业投资企业 作为有限责任公司，股东数量不得超过50人。对于外商投资的有限责任公司，最少注册资本额为500万美元。外商投资成立的创业投资企业的必备投资者（indispensable investors）应当出资不低于总出资额的30%，同时实际出资额也不低于实际总出资额的30%。 3）产业投资基金 由于《产业基金管理办法》还未正式颁布，因此进入门槛仍然不明确。但是对产业基金的管理规定与证券共同基金的管理类似。 B． 税收政策 1）有限责任公司制的创业投资企业 2007年2月15日，财政部和国家税务总局联合发布《关于促进创业投资企业发展有关税收政策的通知》（以下称“2007年通知”）。依据该通知，在一些条件下，例如投资至少持续两年时，对中小型高科技企业投资额的70%可从应赋税收入中减除。依据将于2008年生效的新的《企业收入法》，可减免的应纳税比例为投资额的17.5%（统一税率为25%）。依据2000年6月21日发布的《关于股份制企业所得税有关问题的通知》（以下称“2006年通知”），若创业投资企业的股东为企业，则股东也有权享受免税，从而避免双重征税。但是，若创业投资企业的股东为个人，则其应当缴纳从创业投资企业获得收入的20%的所得税。 2）有限责任合伙人制的创业投资企业 依据2007年通知，有限责任合伙人制的创业投资企业是否同样享受税收优惠政策没有明确规定。依据新的《合伙企业法》，对于合伙企业的生产经营性收入和其他收入，合伙人应当依据国家相关税收条例缴纳他们相应的所得税。所以，投资者似乎应当全额缴纳所得税，没有减免。但是，依据2003年6月4日发布的《国家税务总局关于外商投资创业投资企业缴纳企业所得税有关问题的通知》，（以下简称“ 2003年通知”），对于改组为非法人的外商投资创业投资企业，应当申报企业所得税，企业所得税可以由各投资方分别缴纳，也可以经地方税务机构依据《税法》批准后由创业投资企业统一缴纳。在这种情况下，有限责任合伙人制的创业投资企业可以享受2007年通知规定的税收优惠政策。总之，看起来中国政府鼓励创业投资企业采用有限责任公司的形式。 C． 投资者保护 通常情况下，投资者享有以下权利：第一优先权；跟随大股东随售权 (tag-along rights)；强制大股东随售（drag-along rights）；反稀释权（anti-dilution rights）；转让权；回购权（redemption right）；股票注册权（registration right）。根据经验，投资者最为关心的是以下两个方面：ａ．控制被投资公司股权变更的权利；ｂ．作为最重要的退出机制首次公开发行（IPO）的权利。由于以上两种投资人所得的权利，被投资公司一旦接受私募股权基金的投资，其后就很难摆脱投资者，因为私募股权基金会以相当高的市盈率投资企业，这个高的市盈率也只有私募股权基金可以接受。事实上，第二轮投资人很大程度上遵从首轮投资人的权利。中国资本市场远远落后于发达国家，并且没有向投资者提供足够多的退出机制。庆幸的是中国的资本市场包括股票交易市场的发展非常快。我们期望中国的私募股权市场能够对中国经济的快速增长作出重要的贡献。 |
