New venture capital rules to promote transparency

China will bolster the legal framework governing investment by venture capital funds in the country, in an effort to improve transparency and regulation as the government continues to widen market access.

Wednesday, November 16, 2005

China will bolster the legal framework governing investment by venture capital funds in the country, in an effort to improve transparency and regulation as the government continues to widen market access.

Venture capital companies and private equity funds such as Carlyle Group and Warburg Pincus are boosting investment in China, seeking to tap opportunities offered by some of the mainland's fastest-growing property, telecommunications and consumer services companies.

From March 1, 2006, venture capital funds will be banned from investing in stocks, futures and warrants as well as the real estate and insurance industries, the National Development and Reform Commission, the Ministry of Finance and eight other agencies said in a statement Tuesday.

"This will provide a framework for how people can use their money," said Ymer Venture Capital Asia manager Adam Bornstein. He said the new rules would promote transparency.

Any unused venture funds may be deposited in banks or invested in government bonds and other fixed-income securities, Tuesday's statement said.

China's State Council issued rules in 1999 to allow venture capital funds into the country but investment volumes have fallen since August 2000 due to the absence of a comprehensive legal framework, a commission spokesman said.

Venture capital in China amounted to US$402 million (HK$3.14 billion) in the first half of this year, according to the Asian Venture Capital Journal.

Carlyle said in October it would buy Xugong Group Construction Machinery, China's largest building equipment maker, for US$375 million, the first takeover by a private equity company in China. H&Q Asia Pacific will double its investment in China to US$600 million in three to five years, The Standard reported in September.

Under the new rules, venture capital funds will be restricted from investing more than 20 percent of their assets in one company.

In addition, venture funds should have registered capital of at least 30 million yuan (HK$28.8 million), with an initial investment of 10 million yuan.

The company should also consist of no more than 200 investors, with a contribution of less than one million yuan per investor. BLOOMBERG

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