2012.11.05 WEI, Yingling、CHEN, Wei
A long-anticipated regulation, "Interim Measures for the Administration of Capital Contribution in the Form of Equity Involving Foreign-Invested Enterprises" (《关于涉及外商投资企业股权出资的暂行规定》) has been released by the Ministry of Commerce ("MOFCOM") on September 21, 2012 ("Measures") and came into effect on October 22, 2012. The Measures, although titled with "Interim Measures", are expected to mark another milestone in the promotion of foreign investment in the PRC.
Under the Measures, both PRC domestic investors and foreign investors may make capital contribution by using their equity interests in existing PRC entities to establish or invest in foreign invested enterprises ("FIE") in China. The Measures will supplement the Measures of Administration of Registration of Capital Contribution in the Form of Equity (《股权出资登记管理办法》) issued by the State Administration for Industry and Commerce on January 14, 2009, which generally excludes the capital contribution in the form of equity to the FIEs.
The following are highlights of the Measures.
Transactions Allowing Contribution in Equity
The equity interests eligible for the capital contribution under the Measures should be equity interests ("PRC Equity") of a PRC domestic enterprise or an FIE ("Equity Entity"), which are allowed to be contributed into the registered capital in the following transactions:
(i) Incorporating an FIE by establishing a new company;
(ii) Converting a domestic enterprise into an FIE by increasing capital of the domestic enterprise; and
(iii) Changing the equity structure of an FIE by increasing its capital.
The Measures have implied to exclude other transactions, for instance, purchase of existing shares in a domestic enterprise or an FIE by using the equity interest, out of the allowed transactions with capital contribution in equity.
Qualified PRC Equity
The PRC Equity is required to have a clear and complete title and shall be free of any encumbrances. Specifically, it will be disqualified if,
(i) the registered capital of the Equity Entity has not been paid up in full;
(ii) the PRC Equity is subject to a pledge;
(iii) the PRC Equity is seized;
(iv) the PRC Equity is prohibited from transfer under its articles of association;
(v) the Equity Entity, in case it is an FIE, failed to pass the FIE annual inspection in the previous year;
(vi) the Equity Entity is a foreign-invested holding company, foreign invested venture capital (equity) investment enterprise or a real estate development enterprise;
(vii) the required approval for the transfer of the PRC Equity has not been obtained; or
(viii) transfer of the PRC Equity is prohibited by laws, administrative regulations or State Council.
Key Points to be Noted
(i) Valuation and Pricing
The PRC Equity to be contributed to an FIE must be assessed by a licensed PRC valuation firm. The Measures allow the subscription price of the PRC Equity could be different from the valuation result, provided that the amount counted as the registered capital of the PRC Equity shall be no higher than the valuation result. The difference between the subscription price of the PRC Equity and amount counted as the registered capital may be booked as “capital reserve” of the FIE.
(ii) Foreign Investment Industrial Policies
The Measures make it clear that no capital contribution in equity shall result in any violation of the foreign investment industrial policies including the Industry Guidance Catalogue for Foreign Investment. Any elements of the transaction causing the non-compliance must be split off before the equity contribution.
(iii) No More Than 70%
Under the PRC Company Law, non-monetary contributions in the registered capital of a company may not exceed 70% of its total registered capital.
(iv) Legal Opinion of PRC Law Firm
The legality of the PRC Equity as well as the compliance of PRC foreign investment industrial policies and other regulations need to be addressed by a PRC qualified law firm in a formal legal opinion, which shall be part of the application documents.
(v) Other Regulatory Requirements
If the transaction involves FIE re-investment, change of shareholders of an existing FIE, acquisition of a domestic company by a foreign investor, components subject to the national security review, or any listed company or state-owned enterprise, the applicable regulatory requirements shall also be followed.
(vi) Foreign Debt and Import Duty Exemption Quotas
The registered capital contributed in equity shall be excluded in calculating foreign debt and import duty exemption quota of the investee company. Such restrictions are understandable to the extent that the Equity Entity has enjoyed the quota prior to the transaction. However, it is also possible that an investee company may be unable to borrow foreign debts as much as those in case of all contribution in cash.
Approval Authorities and Examination Process
Capital contribution in equity to FIEs shall be approved by MOFCOM, or its provincial level counterpart at the location of the investee company, in accordance with the examination process as demonstrated in the following chart:
Remarks
Despite the complex approval procedures and the relatively stringent requirements, it is expected that the Measures, by providing an additional way of making capital contribution, would be welcomed by both foreign investors and domestic investors who are seeking innovative structures to make investments or restructure their investment portfolio.
