By: Yi Zhang,  King & Wood’s  Securities & Capital Markets Group 


Legislative research on industrial investment funds started in early 2000. Since the official administrative regulations regarding such funds have not yet been publicly released, the government has been concurrently implementing pilot projects and draft administrative regulations on the subject.

During the pilot period, the National Development and Reform Commission (NDRC) drafted the Administrative Regulations on Industrial Investment Funds, later changing the name to the Administrative Regulations on Private Equity Funds in order to make them applicable to the entire private equity fund industry.


Industrial investment funds

In general, the activities of raising funds from investors and making equity investments in renminbi from industrial investment funds are subject to NDRC approval.

An industrial investment fund can be structured as a limited liability partnership (LLP), a limited liability company (LLC) or a trust. Obtaining NDRC approval removes the risk of the fund being prosecuted for illegal fundraising. Furthermore, an industrial investment fund that obtains such approval has a number of advantages.

Large-scale fundraising

In order to avoid the risk of being considered an illegal fund, a private equity fund with an LLC or LLP structure may be excluded from large-scale fundraising. However, the Bohai Industrial Investment Fund and other industrial investment funds exceed Rmb10 billion.

Easier fundraising from investors

Investors in industrial investment funds are primarily large state-owned enterprises, listed companies or other large entities, such as the National Council for Social Security Fund.

Official approval and support

The NDRC has authorised the government of Tianjin to approve and accept registration for industrial investment funds with total assets of up to Rmb5 billion. A total of 22 fund administration groups have filed with the NDRC.

Investment in structures without industrial investment fund approval

Since the number of industrial investment fund pilot projects is limited, other models are often adopted to engage in private equity investment without industrial investment fund approval. Moreover, local policies and regulations in Tianjin, Beijing and Shanghai allow industrial investment funds to be termed ‘private equity funds’.

Limited liability partnerships

The Partnership Enterprise Law provides that domestic private equity funds can be legally established as LLPs. This model has several advantages, including the avoidance of double taxation, greater decision-making power and fewer restrictions on capital injection.

The Operational Guidelines on Opening Securities Accounts for Partnership Enterprises and Other Non-corporate Organisations allow partnership enterprises and other unincorporated venture capital enterprises to open securities accounts with deposit banks, thus removing an obstacle for private equity funds when seeking to exit the local market.

As a result of the promulgation of the Administrative Measures of Foreign Companies or Individuals Establishing Partnership Enterprises in China and the Administrative Regulations on the Registration of Foreign-Invested Partnership Enterprises, foreigninvested partnership enterprises may engage in private equity business, provided thatthey are authorised by the local branch of the Administration of Industry and Commerce.

Limited liability companies

Before the enactment of the Partnership Enterprises Law, many companies made private equity investments through LLCs, either by engaging in equity investment directly through the existing investment company or by establishing a new company to raise funds and placing the original investment company in charge of investment management. However, enterprise income tax is payable in such cases. Moreover, compared with LLPs, LLCs have a number of disadvantages in this context, including less management power and stricter corporate governance and capital registration requirements.


The Administrative Regulations on Trust Companies, the Administrative Regulations of Fundraising Trust Plans and the Guidelines for Trust Companies on the Operation of Private Equity Investment Trusts allow trust companies to operate private equity funds. Such companies can effectively avoid double taxation. However, the China Securities Regulatory Commission (CSRC) opposes the trust plan as a means of holding shares of a pre-listed company. Therefore, the position may change if the CSRC chooses to act.

Foreign-invested venture capital enterprises

The Administrative Regulations for Foreign-Invested Venture Capital Enterprises provides that foreign enterprises may invest in venture capital enterprises, provided that the Ministry of Science and Technology recognises that elements of the investment encourage high-technology development. Moreover, such investment is subject to the relevant provisions on investment sectors in the Catalogue of Chinese High- Technology Products and the Catalogue of Encouraged Foreign-Invested High- Technology Products. Foreign-invested venture capital firms primarily make private equity investments in pre-listed, high-technology enterprises and provide management services.

Foreign-invested venture capital enterprises can be established in non-corporate form. Such enterprises must have between two and 50 investors, at least one of which must have at least $100 million in capital and at least $50 million in venture capital investments. If the primary investor is a Chinese enterprise, its capital must be at least Rmb100 million, half of which must be in venture capital investments.

The Ministry of Commerce is the approval authority for foreign-invested venture capital. The relevant commerce authorities of autonomous areas, municipalities directly under central government control, cities specifically designated in the state plan, provincial commerce authorities and national economic and technological development zones within provinces all have the authority to examine and approve foreign-invested venture capital enterprises where the total investment is below $300 million.

Venture capital investment enterprises

According to the Interim Measures for the Administration of Venture Capital Investment Enterprises, such enterprises must invest in newly established enterprises or enterprises that are being restructured. The target must register with the Administration for Industry and Commerce. However, this is conditional on the venture capital investment enterprise having at least Rmb3 billion in paid-in capital. Otherwise, the downpayment of paid-in capital must be at least Rmb10 million and all investors must commit to providing the balance of the paid-in capital, in a sum of no less than Rmb30 million, within five years of registration.

In order to supply social security funds, the Implementation Rules for Transferring State-Owned Shareholdings in a Domestic Securities Market to Supply the National Social Security Fund provide that a company limited by shares that has state-owned shares and has completed an inital public offering on a domestic securities market shall transfer its state-owned shares to the National Social Security Fund Council, in a sum equal to 10% of the proceeds of the initial public offering. Furthermore, the State Council has approved a request for exemption for transfer of state-owned shares to social security, which was jointly submitted by the Ministry of Finance, the State-Owned Assets Supervision and Administration Commission and the CSRC. The fact that only guidance documents have been approved and that the implementation rules are being enacted by the Ministry of Finance should make it easier for enterprises to exit from investment projects.

Parallel structured funds

Factors such as foreign exchange examination and approval have resulted in some funds being established as parallel structure funds. In this structure the Chinese fund and the overseas fund are established simultaneously to raise capital from both Chinese and overseas investors. Once the fund management company targets a project company, both sets of investors jointly invest in the project company in proportion to the size of the funds. The distribution of income between the Chinese and overseas funds is decided before the investment project begins.

Key considerations in fund establishment Organisational structures

LLPs and trusts have a significant advantage, as they are not subject to double taxation. The Notification on Issues Regarding Partners’ Income Tax (2008/159) identifies individual partners – rather than partnership enterprises – as the relevant taxpayers and requires them to pay their proportion of income tax under the Personal Income Tax Law, while enterprise partners pay under the Enterprise Income Tax Law. Limited partnerships give partners greater decision-making autonomy and are less limited in terms of capital injection. The fund’s management and operation depend on the fund manager to a significant extent, whereas the influence of the fund investor is correspondingly weaker.

Funds structured as LLCs have a sophisticated governance structure. Institutional investors, which play a key role in this structure, participate in fund management and operation, with the manager’s role being correspondingly restricted. Under this structure, the LLC must pay enterprise income tax. Funds structured as trusts have significant fundraising advantages. However, as payments are made to the trust company, the income in this structure is affected to certain extent. Moreover, when exiting the market, the trust plan faces the risk of falling within the regulation of the CSRC.

Investment period and payback period The provision of an investment period and a payback period is common practice in some jurisdictions. As well as aiding fund managers in making a timely and appropriate choice of investment project, such an approach:

  • improves investment efficiency;
  • limits the investors’ responsibility for investments; and;
  • facilitates the calculation of appropriate management fees based on the manager’s efficiency and performance.

Normally, during the fund investment period the payment base is the total amount contributed by the fund’s investors; during the payback period, the payment base is the total amount of funding provided by the investors. Therefore, when establishing a fund, the investment period and payback period must be stipulated, together with the relevant time limits.

Fund management fees

The fund management fee is one of the key issues that fund initiators and managers must negotiate. The factors to be taken into account include:


  • the manager’s previous performance;
  • the size of the fund;
  • the fields of investment;
  • the basis of the management fee;
  • any agreement on repaying management fees at different times;
  • the criteria for preferential payment to investors; and
  • the criteria for performance awards to fund managers.


Income distribution

The profit distribution of funds concerns not only investment security, but also the establishment of a restrictive incentive mechanism for managers. It is, therefore, one of the key issues to be negotiated by the fund initiators and managers. Generally, the performance commission is distributed in a four-to-one ratio between fund initiators and managers.


The NDRC is reportedly soliciting public comments on the Interim Rules for Filings with Equity Investment Companies.

Over the past two years, domestic private equity investment has greatly increased, but as a result of coordination problems between departments and their supervisory authorities, the Administrative Rules on Private Equity Investment Management have not yet been released. Although some regional administrative policies have been issued, there is still no definitive national legislation.

The interim rules mainly govern the development of pilot projects in four areas: Zhongguancun in Beijing, Binhai in Tianjin, Donghu in Wuhan and the Yangtze delta. The interim rules are expected to be implemented before the end of 2010, once the NDRC has completed its public consultation.

The interim rules stipulate filing provisions for private equity investment organisations. In future, private equity enterprises are likely to lose the option of deciding independently whether to file with the authorities. Before the release of the interim rules, all private equity investment organisations could choose to file with the NDRC on a voluntary basis. The main purpose of such registration is to meet the requirements for investing in the social security fund, as only registered organisations can do so. As a result, a large number of private equity investment enterprises are not under NDRC supervision. In accordance with the industrial and commercial registration, private equity investment enterprises that are registered in pilot regions and have a total capital of over Rmb5 million, but have not filed as venture capital enterprises, must register with the NDRC (with the assistance of the regional development and reform commissions).