In November 2008, the Chinese government decided to further stimulate domestic demand by announcing a RMB 4 trillion stimulus package through to the end of 2010 covering 10 key areas. An unofficial estimation of between RMB 1 billion and RMB1.2 billion will be additionally funded by local governments and players from various industries.
In 2009 the government implemented the relevant regulations and rules to expand investment channels in order to encourage diversified investment and to enhance investment market activities. These regulatory changes include the combination and renewal of market financial products to allow maximum utilisation of reserved capital. For instance, in March the China Insurance Regulatory Commission (CIRC) published, together with other relevant documents, the Guidelines of Setting-upDebt Investment Plan Product for Infrastructural Development (the ‘Guidelines’), andthe Notice of the China Insurance Regulatory Commission on Investing the Insurance Funds in the Infrastructure Debt Investment Plans.
Infrastructural investment project: insurance funds
On March 14 2006, the CIRC issued the Administrative Measures for the Pilot Indirect Investment of Insurance Funds in the Infrastructure Projects (the ‘Administrative Measures’) coded Year 2006 No 1.
Stipulated insurance funds will invest in infrastructural projects under theAdministrative Measures. The trustor entrusts insurance funds to the trustee, who will set up an investment plan in accordance with the intentions of the trustor(s). This will be in the trustee’s own name with funds used in the infrastructure projects, and the trustee will manage or dispose of the funds for the benefit of the beneficiary or for other specific purposes.
The scope of the investment plan includes national infrastructural development projects, such as transportation (including civil aviation airports), telecommunications, energy, public facilities and environmental protection. Investment in these projects can be by way of credit, equity shares, property rights, as well as other feasible methods.
Until now the relevant government and administrative departments had not promulgated or issued any rules regarding plans involving equity shares or property rights. Rather, they focused on those involving loan debt or credit. The Guidelines promulgated this year has further enhanced the operability of investment activities to the infrastructure projects.
Indirect investment of insurance funds
Investment mode of the Infrastructure Debt Investment Plan
What is the Infrastructure Debt Investment Plan (IDIP)? According to the Administrative Measures, and legal analysis, the IDIP is a kind of financial instrument with a relatively simple structure from which entities like insurance asset management institutions raise money. Trustees issue beneficiary certificates of the investment plan, and ensure repayment of the capital and proceeds of the debt investment plan.
Such money raised and sourced from insurance funds shall be used for specified infrastructure projects under an IDIP.
Investment Plan constituent relationships
According to the Administrative Measure’s stipulations, an investment plan is primarily formed by the following parties:
(1) Trustor: refers to insurance companies, groups and holding companies authorised by the CIRC to be set up in China;
(2) Trustee: refers to trust companies, insurance assets management companies, industrial investment fund management companies or other professional management institutions that invest in infrastructure projects in their own names in accordance with the intentions of the trustees for the benefit of the beneficiary;
(3) Beneficiary: refers to the person or persons as specified in the investment plan that has the right to be benefited;
(4) Custodian: refers to commercial banks or other financial institutions appointed by the trustor that are responsible for asset custody in an investment plan as agreed within the plan;
(5) The independent superviser: refers to professional management institutions appointed by a beneficiary that are responsible for supervision of investment plan management by the trustees and of project implementation by the project owner.
The Administrative Measures and Guidelines further define the regulations and limits to, among other things, these participants’ qualifications, corporate management, internal and external risk management policies, senior manager’s qualifications, profit and revenue continuity records. Furthermore, depending on the different terms and conditions of the investment plan, there are possibilities to appoint other entities for capital repayment and warranties.
Issues to be addressed by lawyers
The indirect investment of insurance funds under the IDIP consists of a wide range of constituents and involves a number of participants that are under various legal obligations. This bestows on lawyers a number of legal duties:
(1) To draft transactional contract documents for, among others, custody, investment, independent supervision and guarantee;
(2) To conduct legal due diligence review of, among others, the qualifications of entities, validity of projects;
(3) To investigate the compliance and legality of the IDIP;
(4) To assist in drafting and reviewing the investment plan prospectus;
(5) To draft and review documents non-exclusive to the transactional documents, such as contracts for custody, investment, independent supervision and guarantee;
(6) To issue legal opinion regarding the above matters; and
(7) The design and compliance matters of an IDIP.
The Chinese government is focusing on stimulation of capital consumption, exploring and broadening availability of investment channels, and experimenting with policies across energy and infrastructural investment. These progressive investment methods not only symbolise China’s ever-increasing exploration of opportunities arising from cooperation between the financial markets and various industries, but also provide more choice and potential to expand investment channels towards funding core national industries.