[Federal Register Volume 60, Number 162 (Tuesday, August 22, 1995)]
[Notices]
[Pages 43631-43634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20773]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21282; 812-9572; International 
Series Release No. 839]


CITIC Pacific Limited; Notice of Application

August 15, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANT: CITIC Pacific Limited.


[[Page 43632]]

RELEVANT ACT SECTION: Order requested under section 3(b)(2) of the Act.

SUMMARY OF APPLICATION: Applicant seeks an order declaring that it is 
engaged primarily in a business other than that of investing, 
reinvesting, owning, holding, or trading in securities.

FILING DATES: The application was filed on April 14, 1995, and amended 
on July 31, 1995.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on September 11, 
1995, and should be accompanied by proof of service on applicant, in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request such notification by writing to 
the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicant, Level 35, Two Pacific Place, 88 Queensway, Hong Kong.

FOR FURTHER INFORMATION CONTACT:
Mary Kay Frech, Senior Attorney, at (202) 942-0579, or C. David 
Messman, Branch Chief, at (202) 942-0564 (Division of Investment 
Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch.

Applicant's Representations

    1. Applicant is incorporated in Hong Kong and its shares are listed 
on the Hong Kong Stock Exchange. As of December 31, 1994, applicant had 
market capitalization of approximately US$4.8 billion, making it the 
fourteenth largest company listed on the Hong Kong Stock Exchange.
    2. Applicant's largest shareholder is China International Trust & 
Investment Corporation Hong Kong (Holdings) Limited (``CITIC HK''), 
which indirectly owns approximately 43% of applicant's shares. CITIC HK 
is wholly-owned by China International Trust & Investment Corporation 
(``CITIC''), a state-owned enterprise in the People's Republic of China 
(``PRC''), which is one of the primary investment vehicles of the PRC 
government. CITIC is a ministry-level organization under the direct 
oversight of the State Council of the PRC.
    3. Applicant came into its current configuration in March, 1990 
when CITIC HK bought 49% of applicant's (then named Tyfull Company 
Limited) shares. In August 1991, Tyfull Company Limited changed its 
name to CITIC Pacific Limited. CITIC HK plays an influential role in 
the management and policies of applicant through a management contract 
and a number of common directors and senior officers.
    4. Applicant's long-term objective is to develop as a large 
diversified business with an emphasis on trade and infrastructure 
projects similar to the traditional diversified companies based in Hong 
Kong known as ``hongs.'' Applicant's principal operations are in Hong 
Kong, Macau, and Mainland China. Applicant is treated as a foreign 
entity for purposes of most Chinese regulatory schemes and is subject 
to restrictions on foreign investment and private ownership in certain 
sectors.
    5. Applicant's consolidated total assets increased from HK$1,525 
million as of December 31, 1990 to HK$34,240 million as of December 31, 
1994 (on the basis of audited accounts).\1\ Applicant's growth has 
occurred primarily through the acquisition of new businesses financed 
in large part by the issuance of new shares. Applicant has been 
actively involved in the business affairs of its affiliated companies 
and has made significant contributions to these companies at both an 
operational and strategic level.

    \1\ As of the date of the application, there were approximately 
HK$7.73 to each US$1.
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    6. Applicant conducts its diversified business operations either 
directly or through wholly-owned or majority-owned subsidiaries. 
Applicant, through wholly-owned subsidiaries, owns 100% of the shares 
of Dah Chong Hong, one of the largest Hong Kong based traders and 
distributors. Dah Chong Hong has substantial operations in Hong Kong 
and Mainland China and business in Japan, Canada, and Singapore. Dah 
Chong Hong's business includes distribution and servicing of vehicles, 
and import and distribution of numerous items, including a wide range 
of foods, building materials, electric appliances, and audio-visual 
equipment. Applicant nominates the board of directors of Dah Chong Hong 
and is actively involved in all major decisions regarding its business.
    7. Applicant owns majority interests in Jiangsu Ligang Electric 
Power (Jiangsu Province) and Zhengzhou Xinli Electric Power (Henan 
Province). Each of these entities is a Chinese joint venture company 
established to construct and operate a power station. The partners in 
these projects are Chinese government-owned entities. Under the 
relevant joint venture agreements, applicant has primary responsibility 
for the design and construction of these power stations, and for their 
operation and maintenance as well as financing. In addition, applicant 
recently has acquired a 50% interest in a power plant project in Kai 
Feng, Henan Province, China.
    8. Applicant has a 55% controlling interest in four large 
manufacturing operations in Mainland China that focus generally upon 
items related to infrastructure development, including steel, telephone 
wires and cables, stainless steel pipe, and small and medium range 
motors.
    9. Applicant has 50% interests in two major real estate development 
projects in Hong Kong. Applicant acts as co-developer and plays an 
active role in these projects, which include shopping and office space, 
and residential, hotel, and school facilities.
    10. Applicant has majority interests in several tunnel development 
projects and completed tunnel and bridge operating companies. Applicant 
controls a 50% interest in Western Harbour Tunnel Company Limited 
(``WHTCL''), the leader of the consortium that will build the Western 
Harbour Crossing in Hong Kong. An executive director of applicant 
currently serves as chairman of the board of WHTCL and two other 
officers of applicant also serve on the board. Applicant also owns a 
50% interest in Shanghai CITIC Tunnel Development Co. Ltd., a joint 
venture with Shanghai Huangpu River Tunnel Construction Co. Applicant 
provides advanced management skills to this project, and is an active 
participant in all stages of the project, including design and 
planning, construction, operation and maintenance.
    11. In addition, applicant, through a wholly-owned subsidiary, is a 
45% joint venture participant in Shanghai Huang Pu River Tunnel and 
Bridges Development Company Ltd. (``Huang Pu Tunnel & Bridges''), which 
was granted a 20-year franchise commencing January 1, 1995, for the 
operation, management, and maintenance of a tunnel and two bridges in 
Shanghai, China. The other 55% interest in the joint venture company is 
owned by two PRC companies connected to the Shanghai government. 
Applicant has contractual rights to participate in control of the joint 
venture and appoints three of the seven members of the board of 
directors. These directors actively are engaged in 

[[Page 43633]]
the management and development of Huang Pu Tunnel & Bridges.
    12. Applicant also holds a number of its businesses in the form of 
strategic alliances through shareholdings in companies in which 
applicant holds less than 50% of the equity share capital, many of 
which are controlled companies within the meaning of section 2(a)(9) of 
the Act. Applicant is the largest single shareholder of Dragonair, a 
major regional airline that serves 14 cities in Mainland China and 6 
other cities in Asia from its base in Hong Kong. Applicant, directly 
and indirectly, owns 46.2% of Dragonair's voting securities and has an 
economic interest in an additional 3.75%, for a total economic interest 
of 49.95% Applicant has a controlling influence over the company's 
management through its control of five of eleven seats on the board of 
directors of Dragonair, and has played a key role in negotiating and 
obtaining new routes in Mainland China for Dragonair. Dragonair's 
operations are subject to air transport service agreements between the 
United Kingdom and other countries that effectively prohibit any non-
British company from owning and controlling a 50% or greater interest 
in an airline company in Hong Kong. This restriction is expected to 
change once Hong Kong reverts to Chinese sovereignty in 1997.

Applicant's Legal Analysis

    1. Applicant would like to offer its securities (or depository 
receipts representing securities) in the United States, in private 
placements, offerings to qualified institutional buyers, or possibly a 
public offering. Applicant seeks an order to clarify that it will not 
be subject to regulation as an investment company in the United States.
    2. Under section 3(a)(3), an issuer is an investment company if it 
``is engaged or proposes to engage in the business of investing, 
reinvesting, owning, holding, or trading in securities, and owns or 
proposes to acquire investment securities having a value exceeding 40 
per centum of the value of such issuer's total assets (exclusive of 
Government securities and cash items) on an unconsolidated basis.'' 
Section 3(a) defines ``investment securities'' to include all 
securities except Government securities, securities issued by 
employees' securities companies, and securities issued by majority-
owned subsidiaries of the owner which are not investment companies.
    3. Applicant states that it is engaged primarily in the business of 
trade and infrastructure development through active participation in 
all of its majority-owned subsidiaries and controlled companies and is 
not in the business of investing, reinvesting, or trading in 
securities. Although applicant owns investment securities within the 
meaning of section 3(a)(3) of the Act, and these investment securities 
exceed 40 percent of the value of its total assets on an unconsolidated 
basis, applicant currently is eligible to rely on rule 3a-1 to exempt 
it from the definition of investment company. Applicant is concerned, 
however, that a small change in asset values could deprive applicant of 
the protection of rule 3a-1.
    4. Rule 3a-1 provides a safe harbor for an issuer that derives no 
more than 45% of the value of its total assets (excluding government 
securities and cash items), and no more than 45% of its net income 
after taxes, from securities other than government securities, 
securities issued by employees' securities companies, securities issued 
by majority-owned subsidiaries of the issuer which are not investment 
companies, and securities issued by the companies which are controlled 
primarily by such issuer and (a) through which the issuer engages in a 
business other than that of investing, reinvesting, owning, holding or 
trading in securities, and (b) which are not investment companies. As 
of December 31, 1994, approximately 43.77% of applicant's total assets 
were composed of interests in non-investment company businesses where 
applicant held 25% or less of the business or where applicant held more 
than 25% of the business, but another shareholder held a larger control 
position (thus putting in question whether applicant has the ``primary 
control'' required by rule 3a-1). These assets accounted for 
approximately 32.21% of applicant's total investment income (on a 
dividend basis) for the four fiscal quarters concluded December 31, 
1994.
    5. Section 3(b)(1) of the Act provides that notwithstanding section 
3(a)(3), any issuer engaged primarily, directly or through a wholly-
owned subsidiary or subsidiaries, in a business or businesses other 
than that of investing, reinvesting, owning, holding, or trading in 
securities, in not an investment company. Applicant does not fall 
within this exception because not of its businesses are conducted, not 
directly or through wholly-owned subsidiaries, but through majority-
owned subsidiaries, controlled companies, and other companies.
    6. Section 3(b)(2) provides that notwithstanding section 3(a)(3), 
the Commission may issue an order declaring an issuer to be primarily 
engaged in a business or businesses other than that of investing, 
reinvesting, owning, holding, or trading in securities either directly, 
through majority-owned subsidiaries, or through controlled companies 
conducting similar types of businesses. To clarify its status under the 
Act, applicant requests an order exempting it from regulation as an 
investment company under section 3(b)(2).
    7. In determining whether a company is ``primarily engaged'' in a 
non-investment company business under section 3(b)(2), the Commission 
considers the following factors: (a) The company's historical 
development; (b) its public representations of policy; (c) the activity 
of its officers and directors; (d) the nature of its present assets, 
and (e) the sources of its present income.\2\

    \2\ Tonapah Mining Company of Nevada, 26 S.E.C. 426, 427 (1947).
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    8. Applicant states that it was not established, nor has it 
developed, as an investment company. At the time of the acquisition of 
applicant buy CITIC HK in 1990, applicant was a small company, listed 
on the Hong Kong Stock Exchange, having relatively few assets. Since 
that time, its has grown to become a diversified company, on the model 
of the traditional Chinese ``hongs,'' principally by acquisitions of 
business interests from its largest shareholder, CITIC HK. It is now 
actively engaged in trade and distribution, consumer credit, aviation, 
real estate, telecommunications, tunnels and transportation-related 
facilities, power generation, manufacturing, and environmental 
projects. Applicant's strategy has been to enter a new line of business 
by taking a minority position in a consortium led by an experienced 
industry leader, then, once its has gained sufficient expertise, to 
assume a controlling or majority position. Applicant asserts than many 
of its holdings in China are less than majority-owned because of the 
government limitations on ownership by foreign investors. In addition, 
the holding structure of applicant's businesses in Hong Kong and Macau 
also have been largely shaped by local regulatory and business factors. 
Applicant states that it maintains long-term, substantial positions in 
even its minority-held companies, and has not looked to asset sales as 
an important source of revenue.
    9. Applicant has never held itself out as an investment company 
within the meaning of the Act, and has never been a registered 
investment company (or subject to any analogous regulatory scheme in 
another jurisdiction). Applicant has consistently held itself out to 
its shareholders and the public as a company actively engaged in the 
businesses of trade, distribution, 

[[Page 43634]]
consumer credit, aviation, telecommunications, power generation, 
environment, roads and tunnels, industrial manufacturing, and real 
property. In various circulars issued to shareholders, applicant has 
stated that it expects growth in earnings from its operating 
businesses.
    10. Applicant's principal officers and directors are actively 
engaged in the management and development of applicant's businesses. In 
many of these companies, applicant's officers play a leading role in 
management's strategic decision making or in other essential 
operational functions, such as identifying expansion opportunities or 
leading financing efforts. Applicant's top officers have extensive 
backgrounds in banking, shipping, heavy industry, power generation, 
property development, law, government, accounting, and finance. None of 
applicant's principal officers has experience as an investment manager 
or adviser, and none of them holds himself out as an expert in these 
areas. No principal officer of applicant devotes any of his time to 
investment management, apart from cash management. Applicant estimates 
that approximately 80% of management's time is devoted to considering 
issues related to operating its various businesses, and the remainder 
of management's time is devoted to the pursuit of new business 
opportunities, maintaining relations with joint venture and consortium 
partners, obtaining financing, and administrative matters.
    11. As of December 31, 1994, applicant's majority-owned 
subsidiaries \3\ accounted for 44.46% of applicant's assets for the 
prior 12 months. As of December 31, 1994, Dragonair, a company 
controlled by applicant,\4\ accounted for 6.91% of applicant's assets.

    \3\ Section 2(a)(24) of the Act defines a ``majority-owned 
subsidiary'' of a person as 11a company 50 per centum or more of the 
outstanding voting securities of which are owned by such person, or 
by a company which * * * is a majority-owned subsidiary of such 
person.''
    \4\ ``Control'' is defined in section 2(a)(9) of the Act to mean 
``the power to exercise a controlling influence over the management 
or polices of a company, unless such power is solely the result of 
an official position within such company. Any person who owns 
beneficially, either directly or through one or more controlled 
companies, more than 25% of the voting securities of a company shall 
be presumed to control such company.''
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    12. Applicant also presumptively controls companies other than 
Dragonair that are involved in the development of core infrastructure. 
Applicant asserts that it need not establish that such companies and 
Dragonair conduct ``similar types of business'' within the meaning of 
section 3(b)(2) in order to obtain exemptive relief, however. Section 
3(b)(2) requires similarity of businesses only among those controlled 
companies which must be added to arrive at a determination of the 
primary business engagement of the controlling company.\5\ In 
applicant's case, only Dragonair need be added to applicant's majority-
owned subsidiaries to demonstrate that applicant is primarily engaged 
in trade and infrastructure (aviation) businesses through majority-
owned subsidiaries and controlled companies.

    \5\ In the Matter of American Manufacturing Company, Inc., 41 
S.E.C. 415, 419 (Mar. 11, 1963).
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    13. Accordingly, 51.37% of applicant's assets as of December 31, 
1994, valued in accordance with section 2(a)(41) of the Act, were 
comprised of its majority-owned subsidiaries and Dragonair.
    14. Applicant's income derives from dividends paid out of operating 
returns from the companies through which it does business. As of 
December 31, 1994, 67.80% of applicant's income for the prior twelve 
months was produced by its majority-owned subsidiaries and Dragonair.
    15. Applicant asserts that its historical development, its public 
representations of policy, the activities of its officers and 
directors, the nature of its assets, and the nature of its income 
demonstrates that applicant is not engaged primarily in the business of 
investing in securities. Applicant submits that it is primarily 
engaged, through controlled companies and majority-owned subsidiaries, 
in trade, distribution, transportation, power, and other infrastructure 
industries in the China region.

    For the SEC, by the Division of Investment management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20773 Filed 8-21-95; 8:45 am]
BILLING CODE 8010-01-M