One week after the official launch of the pilot scheme of RMB Qualified Foreign Institutional Investors (RQFIIs) in China, the State Administration of Foreign Exchange (SAFE) issued a notice on 23 December 2011 setting out more detailed rules governing the management of quota and cross-border funds flow related to the investment activities of RQFIIs (the SAFE Notice). Central SAFE and its competent local counterparts (i.e. local SAFE offices) will implement the SAFE Notice in practice.
We summarise below some of the requirements set out in the SAFE Notice:
- RQFIIs, as approved by the China Securities Regulatory Commission (CSRC), must fulfill the required approval/registration procedures pursuant to the SAFE Notice through the onshore custodian banks that the RMB QFIIs may appoint.
- The quota granted by SAFE to an RQFII represents the maximum permitted balance of its in-flow capital less its out-flow capital. The in-flow capital includes the investment principal (plus fees, expenses and taxes incurred in China) remitted to onshore accounts by the RQFII for investment purposes; and the out-flow capital includes proceeds generated from onshore investment activities which have been repatriated overseas. The out-flow capital of an RQFII may be remitted outside China in RMB or a foreign currency.
- An RQFII must not assign or transfer its quota to any third party. If an RQFII fails to utilise its quota effectively within one year after the quota is granted, SAFE may, depending on the specific circumstances, reduce the amount of, or revoke, the quota. The SAFE Notice does not define what would constitute an “ineffective” use of the quota; the implementation of this provision is subject to the discretion of SAFE.
- An RQFII’s custodian bank will process the cross-border funds transfer for the RQFII to the extent that such funds transfer has justifiable reasons and complies with the SAFE-approved quota. In the case of repatriation of investment proceeds by an RQFII, the relevant tax clearance certificate and audit report(s) should be provided to the custodian bank.
- Custodian banks must arrange monthly filings with SAFE in respect of the cross-border capital in-flow and out-flow information of RQFIIs and the amount of foreign currency purchased by RQFIIs for the purpose of repatriation of proceeds. Within three months after the end of each accounting year, an RQFII’s custodian bank must submit to SAFE an annual financial report (including Balance Sheet and Income Statement) of the RQFII as audited by a qualified PRC accounting firm.
- The custodian bank may process the remittance of cross-border funds for an RQFII on a monthly basis, but for an RQFII which has launched an open-ended fund for onshore investment purpose, such remittance may be arranged and processed on a daily basis.
Overall, SAFE’s control over quota and cross-border funds flow under the RQFII scheme is more friendly and flexible than that applicable to the current foreign currency QFII scheme.
For information in respect of the RQFII scheme, please see issue 12 of the PRC Legal Updater - RMB QFII pilot scheme is finally launched in China.