Legal issues in China's QDII regime: Opportunities and challenges

Although it is hard to distinguish legal ownership and beneficial ownership of the QDII assets, PRC law generally provides for the independent status of QDII assets. This is also supported by the fact that the regulators place emphasis on the independence of the custodian and segregation of accounts. Accordingly the use of omnibus accounts by custodians is generally restricted. An overseas investment manager may be engaged on a discretionary or non-discretionary basis while the requirements in this respect are somewhat distinct for different types of QDIIs. Large global fund management groups may be faced with the challenge brought by the onward delegation. Although the QDII regime presents opportunities for overseas fund mangers, there is no change in the PRC securities offering laws which are still very restrictive.Custodians need to be aware of the additional supervisory responsibility but there is no detailed requirement on the manner in which such supervision should be carried out.In terms of notable issues under PRC law relevant to the QDII contracts, it is important to ensure that any limit on the scope of maximum losses under the agreement is in compliance with the PRC Contract Law. A well-drafted indemnity clause which clearly reflects the contracting parties' intention should, generally speaking, be respected by, and enforceable in, the PRC courts. There is a risk that the parties may not be able to rely on the force majeure clause, at least to the extent that it is broader than force majeure events as defined under PRC Contract Law. Relevant requirements on governing law and dispute settlement should also be complied with. Various uncertainties, may lie in lien, set-off and overdraft arrangements.