Private equity funds in China are nervously eyeing a push by the country's top securities regulator to gain oversight of the fast-growing sector, fearing increased scrutiny and tougher new rules.
This could be bad news for foreign private equity firms such as Blackstone Group and Carlyle Group, which are bullish on China but already have to navigate past a phalanx of regulators.
In the wake of the global financial crisis, the question is no longer whether China's private equity industry needs a single regulator and national legislation to fill a legal void.
Rather, the question now is which agency should have the main responsibility and the extent of supervision, part of government efforts to protect investors' interests and curb insider trading, market manipulation and illegal fund raising.
It's a turf battle between the National Development and Reform Commission and the China Securities Regulatory Commission, a foreign private equity executive said, requesting anonymity to avoid repercussions. The lack of transparency is fuelling fears.
The China Securities Regulatory Commission (CSRC) surprised the sector in 2009 with its proposed revisions to the Securities Investment Funds Law, seen by some as an attempt by the CSRC to muscle its way into becoming the sector's main regulator.
The move was a setback for the state economic planner, the National Development and Reform Commission (NDRC) -- currently the main private equity regulator by default -- which had submitted a proposal to the cabinet to win approval to regulate private equity funds.
The cabinet shelved the NDRC proposal after the CSRC argued that the funds should come under its jurisdiction. The Securities Law supersedes measures introduced by any government agency.
The National People's Congress, or parliament, will soon solicit the views of a host of regulators as part of its review of the proposed revisions to the securities law.
The NDRC and the CSRC, reached by phone, declined comment.
Shang Fulin, the country's top securities regulator, is behind the power grab, keen for the CSRC to grow its clout and have the biggest say among regulators. Other cabinet ministries have quietly complained that the NDRC wields too much power.
The state planner became China's de facto private equity regulator after approving the establishment of several government funds.
Both foreign and domestic private equity funds have flocked to voluntarily register with the NDRC to be eligible to receive funding from the National Social Security Fund, albeit not all applications are accepted.
If the CSRC emerges as the main regulator, private equity firms would still have to register with the NDRC if they want a slice of the social security fund pie. With $120 billion in its war chest, the fund is potentially the largest Limited Partner in China.
The industry fears excessive scrutiny by regulators.
Supervision is needed to prevent unqualified investors from entering this high risk game, but there is no need for detailed supervision, said Frances Du, managing director of TCY Capital Management Co and author of a book on venture capital.
Uncertainty looms with fears of restrictions on investors and management companies as well as industries that private equity players can invest in. A requirement to submit annual, or even quarterly, reports, could make compliance more complex.
The industry's worst nightmare would be a regulatory requirement to make their investment portfolios public.
Private equity investors have a strong appetite for risk, said Stephen He, a partner at Beijing Honor Base Law Firm. Supervision should be left to the market.
China's lucrative private equity landscape attracted 82 China-focused private equity funds to set up last year, according to Beijing-based fund consultancy Zero2ipo. The funds raised a combined $27.6 billion yuan ($4.2 billion), more than double the $12.96 billion yuan raised by 30 funds in 2009.
Highlighting the attraction, Carlyle last week offloaded a further $1.8 billion stake in China Pacific Insurance (Group) Co Ltd in what is on track to be the largest exit ever of a private investment in Asia.
Carlyle's remaining stake is worth around $2.5 billion, having sold $860 million worth of shares on December 30. Carlyle had paid just $800 million in a string of investments from 2005 to 2007 for a 15.4 percent stake in China's third-largest insurer.
The regulatory tussle will not affect the former British colony of Hong Kong, which reverted to Chinese rule in 1997 and enjoys a degree of autonomy.
In another snag, the NDRC was forced to defer the Temporary Measures Governing the Registration of Equity Investors in Pilot Areas, which were designed to regulate private equity firms in Beijing's Zhongguancun, Shanghai's Binhai, Wuhan's Donghu and the Yangtze river delta areas, the Economic Observer daily reported.
Wu Xiaoling, vice chairwoman of parliament's financial and economic affairs committee, sought to placate industry fears when she told the Century Weekly magazine that the revisions would avoid naming any government body as the main regulator.
But that left the sector still guessing who their overlord will be.
(Additional reporting by Samuel Shen in Shanghai and George Chen in Hong Kong; Editing by Ken Wills and Lincoln Feast)