Formally ineligible holding companies of foreign financial institutions can now invest in Chinese securities firms, thanks to a regulation under revision that aims to open the door to overseas investors.

Before China Securities Regulatory Commission made this move, only foreign financial corporations - not their parent companies - were authorized to invest in Chinese securities firms.

However, the rules still say that these institutions have to be in the securities business for more than 10 years, have good risk management and internal control systems and a good international reputation.

But with the new rule, the above requirements will not apply to smaller shareholders from overseas who want to invest less than 5 percent into a Chinese securities companies.

There is no major change for foreign financial corporations that hold larger stakes.

"The move, by lowering the threshold for small shareholders, is aiming to provide more opportunities for overseas non-financial institutions and their holding companies to invest in securities," said Dong Chen, a researcher from China Securities.

Dong mentioned that currently foreign investors interested in domestic securities firms are mainly financial institutions that expect much more than a 5 percent share. The draft also places regulations on domestic securities firms.

According to the draft, money must occupy at least two thirds of the firm's total registered capital. The move is said to be a safeguard against investors who use non-performing securities and creditor's rights to invest, which can often lead to bad quality assets from the start.

The draft declared independent board directors should occupy at least one third of the board's seats, increased from the "one fourth seat" rule in previous regulation.

It also extended the time for securities firms to find a commercial bank as their custodian to manage client's money by one year.

The government had originally ordered securities firms to find custodians at the end of 2006.

The China Securities Regulatory Commission will decide which commercial banks will have qualifications to be a custodian.

(China Daily December 29, 2005)