Citi has signed an agreement to form an investment banking joint venture (JV) in China with local outfit Orient Securities.
The new company�called Citi Orient Securities�awaits regulatory approval but Orient Securities is set to have a 67% stake with the remaining 33% belonging to Citi, as per the Chinese foreign ownership cap on securities joint-ventures (JVs).
Orient Securities will pick three board members whereas Citi will pick two and the CEO will be jointly appointed, according to a person familiar with the matter.
Regulatory approval will come from the China Securities Regulatory Commission (CSRC). Citi expects to have the deal approved before the year is out and then go live during the first half of next year, according to the source.
�After you submit the application to the regulators, in the normal case, you would expect it would take six months to get initial approval,� said Jian Fang, a Shanghai-based partner at law firm Linklaters, who specialises in Chinese M&A.
Two important criteria for the CSRC during the vetting process are the terms of management�a nominal independence for the JV�s operations�and the strength of the domestic partner, according to Fang.
�[The regulator] would pay particular attention to the whole governance structure�whether the JV is operating independently from both shareholders,� he said. �And the domestic partner must be tier one or tier two [in terms of quality], not tier three or tier four; the regulators don't want the weaker [domestic securities firms] setting up joint ventures.�
The new company will engage in equity and debt underwriting and advisory services and will explore further cooperation in research and training. Citi�s long term plan is to utilise its global platform to help bring foreign companies, particularly multinationals, to market in the mainland when such opportunities become available.
The Chinese local securities market is beginning to see quite a few JVs between foreign banks and local securities companies crop up. UBS Securities possesses the only securities JV to date that has the requisite licence to operate its own brokerage. Goldman Sachs�s JV with Gao Hua Securities does not have the licence, but Gao Hua itself�which Goldman Sachs controls through a loan used to fund the establishment of the firm�does operate a brokerage locally.
CLSA received approval in 2008 to trade renminbi-denominated shares for institutional investors but does not yet have a licence to tap China�s lucrative retail brokerage market. It is also negotiating a new JV with Citic Securities, one of China�s largest brokerages, to replace its previous arrangement with Fortune Securities.
Apart from Citi, the latest to gain the go-ahead for China securities JVs are J.P. Morgan, which secured approval for its JV with First Capital Securities in December last year, and the Royal Bank of Scotland (RBS), which announced on May 30 that it had inked a JV with Guolian Securities that will be named Huaying Securities.
Other investment banking JVs in China include Credit Suisse�s partnership with Founder Securities, Deutsche Bank�s tie-up with Shanxi Securities (renamed Zhong De Securities), and Morgan Stanley�s agreement with Huaxin Securities.
Australia�s Macquarie is in discussions with Haitong Securities to form a joint venture, according to an April 13 report by Reuters, which cited unnamed sources. Bank of America-Merrill Lynch is still looking for a suitable partner.