CHINA Law and Practice Contributed by: Alan Du and Yiwei Shi, King & Wood Mallesons
fund, the fund manager, investors, other private funds managed by the manager or under the same actual controller, or other related parties that have significant interests with these sub - jects), effective risk-control mechanisms such as disclosure arrangements and special decision- making procedures for related-party transac - tions must be established. Other Specific Requirements Borrowing restrictions According to the Private Fund Provisions, pri - vate funds are generally banned from provid - ing loans or guarantees; but for the purpose of equity investment, if the borrowing or guaran - tee period is less than one year, private equity funds may provide loans or guarantees for port - folio companies, except for a real estate pilot fund, which may provide loans or guarantees to portfolio companies without limitations on the period. Despite the foregoing, the expiry date of the term of borrowing or guarantee must be no later than the end of the investment, and the amount of borrowing or guarantee must not exceed 20% of the total assets of the private fund, except for more lenient restrictions for a real estate pilot fund. Valuation of fund assets The AMAC has published fund valuation guide - lines, which are not compulsory, and provides comprehensive guidance on the valuation of fund investment targets, including stocks, restricted shares, fixed-income instruments and unlisted equity. However, because it is not compulsory, most fund managers do not use the guidelines. Restrictions on related-party transactions According to the Private Fund Provisions, private fund managers must not conduct related-party transactions that may cause loss of fund assets or violate the interests of investors. Private fund
managers should establish mechanisms regulat - ing related-party transactions, such as a pricing policy in relation to related-party transactions and a transaction approval system. Related- party transactions that involve fund assets must acquire pre-approvals from investors through the agreement mechanism, and must be fully disclosed to investors after the investment. Prohibition on insider dealing and market abuse Insider dealing, manipulating a securities and futures market, and other market abuse con - duct are forbidden under the Private Fund Pro - visions. Violations of these rules are subject to strict administrative measures by the CSRC, and the violator shall be publicised through the capi - tal market integrity information database. Also, criminal penalties may be imposed if the relevant conduct constitutes an offence under criminal laws. 2.5 Fund Finance In general, private funds in the PRC are per - mitted to borrow for making investments. For example, private equity funds may access M&A loans, in which commercial banks can provide loans of up to 60% of the transaction price, and the borrower must provide sufficient security for the debt. Restrictions on Borrowings According to the Guiding Opinions on Regulat - ing the Asset Management Business of Finan - cial Institutions (the “Guiding Opinions”), the leverage ratio of an asset management product must be limited, and the total assets of a private product must not exceed 200% of its net assets, which means the borrowing must not exceed 100% of the capital. For graded products (prod - ucts with preferred unit holders receiving dis -
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