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Chinese regulator tightens shareholding cap for insurance company investors

The China Insurance Regulatory Commission will limit a single shareholder's stake in an insurer to one-third, from 51%, and impose specific requirements on different types of insurance company shareholders.

The new rules will further raise the bar for investors entering the Chinese insurance industry to prevent irregular benefit transfers and risks, the regulator said in March 7 statements. The CIRC added that it will not require adjustments to the existing shareholding structures of companies, though it will guide insurers that have potential risks in their shareholding structures.

A controlling shareholder is defined as holding at least a one-third stake in a Chinese insurance company, or has controlling influence over the company's operations. It should have total assets of at least 10 billion yuan and a net assets to total assets ratio of at least 30% in the prior year, and is also not allowed to transfer its shares in the insurer within a five-year period.

Meanwhile, a strategic shareholder holds between 15% and one-third in an insurance company or has significant say on the company's operations. It should have posted a profit for the previous three financial years and have net assets of at least 1 billion yuan. Further, its outstanding equity investments in the insurer should be lower than its net assets level, and cannot transfer its stake in the company for a period of three years.

A type 2 shareholder hold a stake of between 5% and 15% in an insurance company and cannot alter its shareholding for a period of two years, while a type 1 shareholder holds a stake of below 5% and is not allowed to transfer that holding for a one-year period.

Additionally, a foreign investor into any Chinese insurer has to have total assets of more than US$2 billion, be profit-making in the last three fiscal years and carry a long-term credit rating above A for the previous three years.

The regulator added that a single investor, along with its affiliates and persons acting in concert, should only be controlling shareholder for one type of insurer, or controlling shareholder and strategic shareholder of no more than two insurance companies of the same type.

The CIRC also plans to tighten scrutiny on the authenticity of shareholders' reported funding sources, ordering them to use their legitimate own funds to invest in insurers.

Additionally, the insurance watchdog said an insurer cannot use its registered capital to make repeatedly capital contributions to subsidiaries, while shareholders cannot use funds obtained from an insurer's investments to raise its holding in the company further.

In the event that a shareholder of an insurance company is found to have fabricated disclosures related to its holding in an insurer, the CIRC will direct the investor to transfer or auction off the shares held and limit its investments in the insurance sector.

The CIRC will also form a negative list to identify the investors banned from investing in insurance companies, investors not approved to act as controlling shareholders of insurers, as well as the types of funds that cannot be used to make investments in insurance companies.

These new rules take effect April 10.

As of March 6, US$1 was equivalent to 6.31 Chinese yuan.