The draft law also deals with the independence of funds properties.

These major moves are intended to strengthen protection for investors and are some of the highlights of the second version of new draft legislation on securities investment funds, an industry insider told China Daily.

The insider refused to be identified due to the sensitive impact of any legislative processes on the immature market sentiment of the funds industry.

Securities investment funds are mainly mutual funds which are invested primarily in stocks and operated by investment companies. Retail investors pay a fee to invest their pooled money, in order to see more stable returns on investments through the use of professional fund managers.

The net assets of the country's securities investment funds have reached over 120 billion yuan (US$14.5 billion), accounting for just under 10 per cent of the nation's stock value.

The draft legislation, submitted to the top legislature for its first review last July, was debated last week by members of the 10th National People's Congress (NPC) Standing Committee, the nation's top legislative body.

"It is a tough challenge to convene a general meeting of all funds investors at a specific location as one single fund may represents thousands or tens of thousands of buyers," said the insider.

The pending draft law on securities investment funds states that holders of over 10 per cent of the total funds units can hold a general meeting on the same issue, while both the custodians and trustees of the fund refuse to do so. The meetings can be held either at a specific location or via some other means of communication.

But previous versions of the draft law have only offered investors the option of asking industry supervisors to appoint the investment companies or trustee banks to hold such a meeting.

In its general rules, the draft law stipulates that funds properties are independent from the original properties of both investment companies and their trustee commercial banks.

"It is a major principle of the draft law,'' said Cheng Siwei, vice-chairman of the NPC Standing Committee.

"The debts of the investment companies should not be covered by funds properties which belong to the investors.''

Currently, China has approved 28 investment companies to manage 54 close-ended funds and 21 open-ended funds.

Close-ended funds are those with a fixed number of total available shares. They cannot be redeemed before maturity. Open-ended funds, on the other hand, can be redeemed at any time and thus offer greater liquidity and usually yield higher returns.

The draft law also better defines the responsibilities of investment companies and their senior management.

It will need further debate by national legislators before reaching the point it can be voted upon, said the industry insider.

Draft legislation is usually eligible for a final ballot after going through three rounds of deliberations and revisions, according to the Law on Legislative Procedures.

(China Daily July 7, 2003)