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Overview of QDLP Pilot Program

2021.05.14 XIE, Qing (Natasha)、Jessica QIN

Since Shanghai initiated the first Qualified Domestic Limited Partnership (QDLP) pilot in 2012, the QDLP pilot program has been implemented and evolved for around 10 years. Thus far, Shanghai, Beijing, Qingdao, Hainan, Guangzhou and Suzhou are among those cities that have been successively granted the QDLP investment quota and launched the QDLP pilot program. Shanghai, as one of the first pilot cities, has the most mature QDLP mechanism and is the first city that has achieved normalization of the QDLP pilot program.


I Comparison of QDII, QDLP and QDIE Programs


The Qualified Domestic Institutional Investor (QDII), QDLP and Qualified Domestic Investment Enterprise (QDIE) schemes all allow qualified institutions to raise funds onshore  to invest in offshore markets and have become predominant offshore asset allocation channels for domestic institutions and high-net worth individuals.


First launched in 2006, the QDII program aims to enable domestic financial institutions (including commercial banks, trust companies, securities companies, mutual fund management companies and insurance companies) to invest in offshore markets. Domestic financial institutions shall apply to their own regulator for the QDII qualification and investment quota. The investment scope of QDII products issued by different financial institutions are subject to the relevant rules of their own regulators.


The QDLP and QDIE pilot programs are supplemental to the QDII program. The QDLP pilot program aimed to allow qualified foreign institutions to apply for QDLP pilot qualification and then launch QDLP funds in those cities with QDLP investment quota but gradually, some pilot cities began to allow qualified domestic private fund managers to apply for the QDLP qualification in addition to qualified foreign institutions. In practice, almost all QDLP funds are feeder funds that will invest most of their assets into an offshore fund managed by the foreign QDLP applicant or offshore affiliates thereof (i.e., the master fund of the QDLP fund, “Offshore Master Fund”). The Offshore Master Fund will invest in offshore underlying assets while no discretionary investment management will be conducted at the QDLP fund level. In other words, a QDLP fund is more of a fundraising channel for the Offshore Master Fund. At present, some of the pilot cities are exploring the feasibility of launching discretionary QDLP funds, i.e., allowing QDLP funds to directly invest in offshore underlying assets.


The QDIE pilot program has only been implemented in Shenzhen. In practice, unlike QDLP pilot program, the QDIE pilot program is a channel for domestic financial institutions and private fund managers to invest in offshore primary markets, and QDIE funds are not encouraged to invest in offshore secondary markets. On April 30, 2021, Shenzhen released the Administrative Measures for the Pilot Work of Domestic Qualified Investors’ Offshore Investments of Shenzhen (“new QDIE Rules”) to improve the QDIE program. Under the new QDIE Rules, QDIE managers can be established by foreign investors, thus they are categorized into foreign and domestic QDIE managers. Meanwhile, the new QDIE Rules expand the investment scope of QDIE funds, i.e., other than offshore primary market investments, QDIE funds are explicitly allowed to make other investments including offshore debts, non-publicly offered and traded equities and bonds of offshore listed companies, private equity-type and securities-type funds incorporated outside China.


In practice, QDII investment quotas and QDLP investment quotas are both granted to qualified institutions. Institutions with QDII or QDLP qualifications can decide at their discretion how to allocate their investment quotas among the products they manage. While QDIE quotas are granted to the specific investment project, and the new QDIE Rules allow changes to the proposed investment projects as needed.


II Comparison of QDLP Policies of Major Pilot Cities


Below we compare the QDLP policies of Shanghai, Beijing, Qingdao and Hainan (the “four pilot cities”).


1. Typical QDLP Pilot Structure


The basic QDLP structures of the four pilot cities are the same, as illustrated in the chart below.






Note: In practice, the QDLP fund custodian and the fund administrator can be the same institution.


To participate in the QDLP pilot program, a foreign institution needs to set up a QDLP fund manager in China. The QDLP fund manager can launch QDLP funds only after it has been registered as a manager of other-type private fund with the Asset Management Association of China (AMAC). In practice, QDLP fund managers are mostly corporate, and QDLP funds are mostly formed by contract.


2. Qualification Requirements for Shareholders


The four pilot cities all set requirements for the QDLP fund manager’s de facto controller, controlling shareholder or executive partner. Among them, the QDLP qualified applicants in Qingdao are only allowed to be foreign institutions, while Beijing and Hainan allow qualified domestic private fund managers (PFM) that have launched at least one private fund to apply for the QDLP pilot qualification.


The four pilot cities all require the de facto controller, controlling shareholder and/or any affiliates of the controlling shareholder to have certain investment management experience and/or financial licenses. Meanwhile, requirements are set on their operation status, internal governance structure, internal control policies and compliance status. Among the four pilot cities, Beijing explicitly requires that the QDLP applicant’s de facto controller, controlling shareholder or executive partner shall be a financial institution or have assets under management not less than RMB 100 million(or equivalent). Beijing and Hainan also set explicit requirements on the net asset value.


As the foregoing requirements are not targeting the direct shareholder of a QDLP fund manager, a foreign institution may choose an appropriate entity within their group to be the direct shareholder of the QDLP fund manager according to their group’s development plan, tax consideration, etc.


3. Registered Capital


Except for Qingdao, the other three cities all set requirements on the registered capital of a QDLP fund manager. The minimum registered capital of a QDLP fund manager to be incorporated in Shanghai, Beijing and Hainan is USD 2 million (approximately RMB 13 million), RMB 30 million(or equivalent) and RMB 5 million (or equivalent) respectively.


4. Requirements for Senior Management Personnel and Investment Management Personnel


In terms of the number of senior management personnel, Shanghai requires a QDLP fund manager to have at least 2 senior management personnel, i.e., one legal representative or executive partner (or the representative of the executive partner) and one compliance officer; Qingdao only requires one senior management personnel. Both Shanghai and Qingdao set requirements on the investment management experience, senior management experience and compliance records of such senior management personnel. Beijing and Hainan require a QDLP fund manager to have at least one qualified investment management personnel. Shanghai and Qingdao further require that at least one senior management personnel shall reside in the city.


It is noteworthy that a QDLP fund manager is mandatorily required to be registered with the AMAC as a PFM, hence, at least 5 employees are needed to meet the AMAC’ s requirements. In practice, for a foreign institution that applies for QDLP pilot qualification in Shanghai, if the QDLP fund manager is to be established as a wholly-owned subsidiary (QDLP SPV) of a wholly-foreign owned private fund manager (WFOE PFM), then no additional requirements will be set on the QDLP SPV’s registered capital, registered address and personnel. The QDLP SPV’s registered capital can be only RMB 2 million and it may share personnel and registered address with the WFOE PFM.


5. QDLP Funds


(1) Investment Scope


The investment scope of the QDLP funds in the four pilot cities are set forth below:





Shanghai



Offshore market investments.



Beijing



Offshore securities markets; underlying assets such as offshore commodities, precious metal, hedge funds, REITS, financial derivatives; investing in other securities investment funds; launching offshore securities investment feeder funds; offshore debts, shares of securities-type funds; non-public investments such as non-listed enterprises, private equity-investment funds.



Hainan



Equities and bonds of offshore non-listed enterprises; non-publicly offered and traded stocks and bonds of offshore listed companies; offshore securities markets (including the financial instruments traded on offshore securities markets); offshore equity-type and securities-type investment funds; offshore commodities, financial derivatives.



Qingdao



Mainly investing in offshore secondary markets and may explore participating in merger and acquisition businesses of offshore primary markets and regulated commodity markets





In practice, a QDLP fund established in Shanghai will normally invest in the offshore underlying assets by investing in an Offshore Master Fund, but Shanghai sets no restrictions on the underlying assets of a QDLP fund. Currently, Shanghai is exploring how they might allow QDLP funds to adopt a discretionary management model and directly invest in the offshore stocks, bonds and other investment instruments.


(2) Initial Fundraising Scale


Other than Qingdao, the other cities (Shanghai, Beijing and Hainan) all set requirements on the fundraising scale of QDLP funds, i.e., RMB 100 million (or equivalent) for Beijing, RMB 30 million (or equivalent) for Hainan, RMB 100 million for a QDLP fund formed by partnership enterprise in Shanghai and RMB 30 million for a QDLP fund formed by contract in Shanghai. 


III QDLP Application Procedures (Shanghai and Beijing)


The QDLP application process is similar in all cities, including requirements to submit application documents to the local competent authorities, and obtain the QDLP qualification after being reviewed and approved. Below we take Shanghai and Beijing as examples to briefly introduce the application procedure. 

Shanghai QDLP Application Procedures







No.



Procedures



Remarks



1.



Submit Pilot Application



Submit the application documents to the Joint Conference

Submit Pilot Application




2.



Submit the application documents to the Joint Conference

Submit Pilot Application

Joint Conference Review



The Joint Conference reviews the application documents and issues opinions.

Note: The Joint Conference is currently convening online during this special period caused by COVID-19. The applicant does not need to attend the Joint Conference in-person.



The SFRB will issue an endorsement letter of the applicant who has been permitted by the Joint Conference to the Shanghai Administration for Market Regulation (SAMR) and ask the SAMR to assist in the relevant company incorporation and registration formalities.



3.



QDLP Fund Manager Setup/QDLP Fund Setup (if needed)



1)Apply to the SAMR for pre-name approval


2)Complete company registration (SAMR)

If the QDLP fund is to be established in the form of partnership enterprise, then it shall be established only after the QDLP fund manager has been set up. 



Usually, it will take around one month from the name pre-approval to obtaining the business license (excluding bank accounts opening). Opening bank accounts usually takes about 1 month.



4.



Apply for  Pilot Qualification and Investment Quota

(Permitted immediately after obtaining the business license.)



The applicant shall apply to the Joint Conference for pilot qualification and investment quota. The SFRB will issue an approval letter, informing the applicant that it has obtained the pilot qualification and the relevant investment quota.



1) AMAC registration is not a precondition of the application for pilot qualification and investment quota.

2) An applicant is required to complete the fund raising and fund launch within six months after obtaining the pilot qualification.



5.



Foreign Exchange Registration Formalities



Handle the foreign exchange registration formalities with the Shanghai Branch of the State Administration of Foreign Exchange after obtaining the approval letter of the Joint Conference.



The custodian bank will assist with foreign exchange registration. Please refer to the custodian bank’s requirements on the application materials.



Beijing QDLP Application Procedures







No.



步骤



备注



1.



Submit Pilot Application



Submit the application documents to the Joint Review Work Office.




2.



Joint Conference Review



The Joint Review Work Office  determines whether to accept the application, consults with the members of the Joint Review Work Office, and organizes the joint review work meeting to review the application materials.



If an applicant is determined to be qualified for the QDLP pilot program, the Joint Work Conference will issue the written approval for the pilot qualification and investment quota. (“Written Approval”)



3.



QDLP Fund Manager Setup/QDLP Fund Setup (if needed)



1) Apply to the BAMR for pre-name approval

2) Complete company registration (BAMR)

The applicant shall handle the PFM registration after company registration.





Usually, it will take around one month from the name pre-approval to obtaining the business license (excluding bank accounts opening). Opening bank accounts usually takes about 1 month.



4.



Foreign Exchange Registration Formalities



Handle the foreign exchange registration formalities with the foreign exchange authority and open the relevant accounts with the custodian bank.



The custodian bank will assist with foreign exchange registration. Please refer to the custodian bank’s requirements on the application materials.



IV Our Services


1. QDLP Qualification Application


  • Assisting with QDLP structure design (e.g., selection of pilot city, application entity, personnel arrangement, and tax consideration);

  • Assisting with preparing the full package of QDLP application materials;

  • Assisting the applicant with communication with the relevant regulatory authorities.


2. Establishment of QDLP Fund Manager


  • Assisting the applicant in preparing the complete set of application documents required for company registration;

  • Assisting with the company setup;

  • Advising on tax, labor, cybersecurity, data compliance and other considerations. 


3. PFM Registration


  • Conducting legal due diligence and issuing the legal opinion for the purpose of PFM registration;

  • Advising on how to fulfill the requirements of the Ambers system;

  • Providing legal advice on any issue related to PFM registration;


4. QDLP Fund Launch


  • Assisting the applicant in selecting a custodian bank, fund administrator and other agencies;

  • Assisting the applicant in drafting the full set of QDLP fund documents (e.g., fund contract, outsourcing agreement, distribution agreement, etc.)

  • Advising on any issue related to the QDLP fund launch. 


5. Ongoing Support for the Operation of the QDLP Fund Manager and QDLP Fund


  • Advising on issues, from a legal perspective, that may arise in the course of operation of the QDLP fund manager and QDLP fund.

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