On April 28, 2013, the State Administration of Foreign Exchange (the “SAFE”) promulgated the Administrative Measures of Registration of Foreign Debts (the “Foreign Debt Measures”) together with the detailedOperational Guidelines of Administration of Foreign Debt Registration (the “Guidelines”). Both regulations will be implemented from May 13, 2013. The Foreign Debt Measures and the Guidelines have simplified some of the foreign debt approval requirements and clarified previous uncertainties in the practice of foreign debt registration and administration. The key changes in the Foreign Debt Measures and Guidelines are as follows:
1. Classifying different types of foreign debt administration
Under the Foreign Debt Measures and the Guideline, borrowers are classified as three different groups: government finance authority, domestic banks and non-banking borrowers. Where a debtor is a finance authority, it shall report to the local SAFE the preceding month’s information on contract execution, withdrawal, repayment and account changes in relation to the foreign debts and the related currency conversion between foreign exchange and Renminbi (RMB) within the first 10 working days of each month. Where a debtor is a domestic bank, the debtor shall report the information of foreign debts through the relevant online administrative system run by SAFE for each of the debts. Where a debtor is a non-banking enterprise, the debtor shall register each of the debts to their local SAFE within the designated time limit.
2. Specifying the proceeds of foreign debt
With respect to the foreign currency conversion of foreign debt proceeds, the Foreign Debt Measures also explicitly provide that proceeds of foreign debt borrowed by the non-banking enterprises may be converted into RMB directly by the account bank when making RMB payments that conform to the regulatory requirements. However, unless otherwise stipulated, foreign debt borrowed by onshore financial institutions and Chinese enterprises (“FIEs”) in foreign exchange may not be converted into RMB.
With respect to the use of proceeds of foreign debt, the Guideline provides that foreign debts could be used for trading of goods and services within the borrower’s business scope, and for financial asset transactions as prescribed by laws. With respect to the use on transactions of financial assets, the following requirements and restrictions shall be followed:
(1) Repayment of existing debts with new foreign debt borrowing is allowed, but the new foreign debts cannot be converted into RMB.
(2) Foreign debts could be used for equity investment by setting up new enterprises or acquiring equity or shares in any Chinese or foreign enterprises, provided that for such purposes (a) only transfer with original currency of foreign debts is permitted, i.e., no conversion of foreign currencies into RMB is allowed, and (b) the borrowers should have the approved business scope to do equity investment. Based on the restrictions on fund transfer and business scope, this provision should only apply to FIEs having the business scope to do investment activities, such as foreign-funded investment companies, foreign-invested venture capital companies, and foreign-invested partnership enterprises which engage in private equity investment. Ordinary FIEs cannot use foreign debt for reinvestment in China.
(3) No foreign debts could be used for providing loans, except for loan extensions by foreign-invested leasing companies or foreign-invested small loan companies;
(4) No foreign debt could be used for providing mortgage or pledge, except for that made by guarantee companies;
(5) No fund raised by foreign debts could be used for securities investment; and
(6) Where the funds in a foreign debt account need to be saved as fixed-term deposits, the debtor can carry out the relevant procedures with the same bank in the jurisdiction of the same branch of SAFE, as long as there is no conversion or transfer of funds.
3. Simplifying the administration process for foreign debt registration
In accordance with the Foreign Debt Measure and the Guideline, non-banking borrowers are still required to register foreign debt with their local SAFE. However, they have abolished certain administration procedures process for foreign debt, such as the approval from local SAFE to open a designated account for foreign debt, the verification and approval formalities for conversion of loan proceeds into RMB and repayment of principal and interests. Instead, after the foreign debt registration, non-banking borrowers may open an account, make drawdown, conversion and repayment with the settlement banks directly. Below is a table summarizing the changes in such procedures:
|Previous Regulation||Foreign Debt Measures and Guidelines|
SAFE Registration for Foreign Debt
|SAFE Approval for Account Opening||
|SAFE Registration for Drawdown||Yes||No|
|SAFE Verification for Conversion of Loan Proceeds into RMB||Yes||No|
|SAFE Verification for Repayment of Principles and Interests||Yes||
4. Clarifying uncertainties of foreign debt quota for FIEs
(1) Determination of Foreign Debt Quota for FIEs with Insufficient Paid-in Capital: The Foreign Debt Measure and the Guideline have provides that the foreign debt borrowing capacity of an FIE shall continue to be subject to the quota of “Tou Zhu Cha” (i.e. the gap between the total investment and registered capital of an FIE, “投注差” in Chinese). Meanwhile, the Guideline provides further clarification on the conditions that FIEs’ borrowing foreign debt are required to satisfy, for example: (a) when borrowing foreign debt, the foreign shareholder shall make its capital contribution in compliance with the relevant provisions of the investment contract and articles of association, and (b) the available foreign debt quota that can be taken up shall be equal to the ratio of the foreign shareholder’s paid-in registered capital multiplied by its “Tou Zhu Cha”.
(2) Determination of Foreign Debt Quota for FIEs with Extension or Refinancing: The Foreign Debt Measures provide that if the term of medium- or long-term foreign debt borrowed by an FIE is extended or refinanced, the “Tou Zhu Cha” taken up by such foreign debt will not be taken up under the conditions that there is no increase in the amount of its existing foreign debt and no foreign exchange conversion. This provision provides a feasible approach for FIEs to extend their existing foreign debt or refinance without using its foreign debt quota.Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.