By Hao Wang

wh@rayyinlawyer.com

The China Banking Regulatory Committee (CBRC) has approved Barclays Bank¡¦s acquisition of nearly 20% of the equity of Xinhua Trust and Investment Company (TIC) in Chong Qing. If all the paper work and other approval processes can be completed as expected, Xinhua TIC will be the first PRC TIC having overseas strategic partners. It has also been said that Ashmore, a private equity fund, is negotiating with the Beijing Municipal Government to acquire Beijing International Trust and Investment Company.

PRC Trust and Investment Company is a non-banking financial institution, which is directly under the supervision of the Non-Bank Financial Institution Department of the CBRC. As the CBRC amended the regulations for PRC trust companies earlier this year, Trust and Investment Company will be renamed as Trust Company¹. As to their business scope, apart from trustee services, qualified trust companies are encouraged to do investment banking services, private equity services and asset management services as well.

As the China Securities Regulatory Committee [CSRC] has virtually blocked any foreign investors from acquiring PRC securities companies, foreign investment banks or private equity funds may take the opportunity to acquire PRC trust companies to engage in related services.

The Concept of a Trust under the PRC Legal Framework

To introduce the trust concept into a civil law system, it makes sense to begin with the use of a less extensive type of trust. Thus, the PRC Trust Law of 2001 treats the settlor, the trustee and the beneficiaries as if they were parties to a special contract. Under this ¡§special contract¡¨ concept, the settlor has special rights, which are then extended to the beneficiaries, and under which the trustee cannot resign without the consent of the beneficiaries and of the settlor, so that the trustee cannot unilaterally replace itself with a new trustee. The trustee manages the trust property in the trustee¡¦s own name in accordance with the wishes of the settlor as expressed in the trust document and in the best interests of the beneficiaries, of whom at least one must be in existence at the creation of the Trust. The key duty of the trustee is to keep the trust property separate from privately owned property and to keep separate accounts for the trust property.

Another aspect of this special kind of contract is that the settlor, like the position in English law, has the right to have information from the trustee about the trust and, in some cases, to remove the trustee. More controversially, unlike the position in English law, when one trustee retires and another trustee takes over, the new trustee inherits not only the rights of the trustee as trustee, but also his obligations; or at any rate, those in respect of third parties. It is not entirely clear whether this takeover of liability extends to private contracts entered into by the first trustee in handling trust affairs.

What a PRC Trust Company Can Do

On March 1 2007, the Measures for the Administration of Trust Companies [the Measures] as issued by the CBRC² became effective. Apart from setting out the parameters for the business operation of trust companies, the new regulations are aimed at the forming of a PRC trust company into a financial institution with not only trustee services, but also investment banking services, and becoming a financial holding company.

The trust company¡¦s capital comprises two parts: its own capital, and capital entrusted by other person (i.e., investors or beneficiaries). The Measures provide what a trust company can do with its own capital and capital entrusted by other person (trust assets).

A trust company can use its own money in the following ways: lending to and borrowing from other financial institutions, making loans, leasing, and investment. Investment areas of its own capital are limited to equity investments into financial companies, investment in financial products, and self-use fixed assets.

A trust company can use trust assets via lease, sale, deposit, purchase and resale, making loans, investment and other such methods.

Therefore, a trust company actually enjoys quite a wide business scope as a financial institution, especially in terms of becoming a future financial holding company and making use of capital entrusted by another person.

Under the Measures for the Administration of Collective Trust Plans of Trust Companies, a trust company can make a private placement legitimately by collecting funds from individuals and institutions. Thus, an investment fund can easily be established.

Trust companies can also be involved in enterprise annuity arrangements and credit asset securitization structures.

As an early bird, Barclays Bank has rightly sensed how to embark on new wealth management and investment banking business in the PRC. Who will be the next?

Endnotes

1   Under the newly issued Regulations on Trust Company Management, all current TICs need to apply for new business licenses before 2010 where Trust and Investment Company will be renamed as Trust Company.

2   The author was invited as the legal counsel for the drafting of the Measures and Rules for the Administration of  Collective Capital Trust Plans by the CBRC.