This article introduces some frequently asked questions from our customers regarding lending and cross-border security in the People’s Republic of China (the “PRC”, and for the purposes of this article only, we are not referring to Hong Kong Special Administrative Region of China. Macao as well as Taiwan, mentioning the PRC).
1. Is a license or regulatory approval required for foreign lenders to lend in the PRC or to take as collateral assets located in the PRC?
No license or regulatory approval is required for foreign lenders to lend money to PRC entities or to secure collateral on assets located in the PRC.
2. What are the regulatory requirements on foreign borrowing / debt?
(1) Limits on external debt
The external debt quota system established under the laws of the PRC requires that the risk-weighted balance of all foreign loans borrowed by a borrower from the PRC (other than a bank) not exceed its debt quota. external, which must be calculated according to the following formula:
PRC borrower’s net assets × cross-border finance leverage (currently set at 2) × macroprudential adjustment parameters (currently set at 1.25)
If the PRC borrower is a foreign-invested enterprise (“FIE”), it can opt for the foreign debt quota system or adopt the old regime under which it is allowed to borrow foreign loans up to an amount equal to the difference between its total investment amount and its share capital. The basis for calculating the external debt limit, once determined by the FIE, will remain consistent and will be deposited with the local exchange administration (“SAFE”). The legal requirements relating to the correlation between the total amount of the investment and the share capital of an FIE are listed in the table below:
|Total amount of investment||Share capital required (as a percentage of total investment)|
|Less than $ 3 million||70%|
|US $ 3 million – $ 10 million||50% (minimum US $ 2.1 million if the total investment amount is less than US $ 4.2 million)|
|$ 10 million – $ 30 million||40% (minimum US $ 5 million if the total investment amount is less than US $ 12.5 million)|
|Above $ 30 million||1/3 (minimum US $ 12 million if the total investment amount is less than US $ 36 million)|
(2) Registration of foreign debt
The borrower from the PRC must apply for registration with SAFE at least three working days before the first drawdown of the foreign loan. Without the registration of foreign debt, no loan can be drawn or repaid by the borrower from the PRC. If any of the terms, amount, creditor (s) or other material conditions under the loan agreement is changed, the borrower of the PRC should update the record accordingly. When the foreign loans are fully repaid, the PRC borrower cancels the registration of the foreign debt with SAFE.
(3) NDRC filing
If the term of the foreign loans is one year or more, the borrower from the PRC must also file the foreign loan with the National Development and Reform Commission (“NDRC”). It should be noted that NDRC filing is also required when the borrower is an offshore entity controlled by a PRC entity.
3. What are the formalities for setting up and perfecting collateral on the shares of a PRC company?
(1) Constitution and registration of the pledge of shares
To create a pledge of shares, (i) a pledge of shares must be signed by the pledge grantor and the pledgee (and usually the PRC company in which the shares are pledged as it is to assist in the collateralization. registration of the pledge of shares), and (ii) the pledge of shares must be filed and registered with (A) the local company registration authority jointly by the pledge grantor and the pledgee or by an agent (a representative) appointed jointly by the pledge settlor and the pledgee, if the PRC company in which the shares are pledged is a limited liability company, or (B) the securities custodian and the clearing institution (with exceptions), if this PRC company is a company limited by shares.
Lenders of a syndicate may appoint a security officer to hold the pledge of shares on behalf of the syndicate and assert the rights of the syndicate under the documents relating to the facility, and in this case, the security officer must be registered as a pledgee. The contract of pledge of shares can be executed by exchange of signature pages by the parties. No physical delivery of the request documents by the pledgee and / or the pledge grantor is required if an agent is jointly appointed by them to submit the request for registration of the pledge of shares.
(2) Cross-border security registration
Two types of cross-border securities must be registered with SAFE, one is the national title for foreign loans (“NBWD”,) and the other is the foreign title for domestic loans (“WBND”, 外 保 内 贷) . NBWD means the guarantee provided by a national entity located in the PRC in favor of a foreign entity located outside the PRC to secure repayment by a borrower located outside the PRC, and WBND refers to the guarantee provided by an entity foreign bank located outside the PRC in favor of a PRC entity to secure repayment by a borrower located in the PRC. If the equity pledge is created by a foreign shareholder of a FIE in favor of a foreign pledgee to secure repayment by a foreign borrower, no cross-border collateral registration is required for such a pledge of shares. However, if the pledge of shares is made by a PRC shareholder of a PRC company in favor of a foreign pledgee to secure repayment by a foreign borrower, the registration of cross-border securities is performed.
(3) Realization of the pledge of shares
In the event of default by the borrower and the pledge grantor under the facility documents, the pledge grantor cannot unilaterally sell or transfer the pledged shares to himself or to a third party and must apply to the court for the execution of the pledge of shares. If the pledged shares were to be transferred to a foreign entity, the foreign investment requirements under the laws of the PRC must be met.
4. Are there any security registration requirements for providing a warranty?
If a warranty constitutes NBWD or WBND, the warranty must be registered with SAFE. SAFE would take a prudent approach to review the application for cross-border securities registration and assess the rationality and authenticity of the creation of the collateral as well as the feasibility of the enforcement of that collateral and payment by the PRC entity since the RPC (particularly in the case of NBWD) to determine whether such a warranty could be registered. Without the completion of such a cross-border security registration, no cross-border money flow could be made to or from the PRC.
5. Is the constitution of a pledge of receivables in favor of a foreign pledgee legally possible and what formalities must be followed?
The constitution of a pledge of receivables in favor of a foreign pledgee is legally possible. For the pledge to take effect, (i) a pledge agreement must be signed by the pledgee and the pledgee, and (ii) the pledge must be registered with the Credit Reference Center of the People’s Bank of China.
In practice, it is important for the pledgee (a) to exercise due diligence on the underlying claims on which the pledge would be made in order to ensure ownership, authenticity, amount and timeframe. payment of these debts; (b) enter into a tripartite receivables confirmation letter with the seller (the pledge settlor) and the buyer (the debtor of the receivables) to ensure that the buyer acknowledges the pledge of the receivables and agrees to pay on the designated escrow account opened by the pledge with a bank in the PRC; and (c) enter into an escrow agreement with the pledge grantor and a bank in the PRC (as escrow agent), under which the pledge grantor will open an escrow account to receive the claims of the buyers and no outgoing transfers. will not be carried out without instruction or approval from the pledgee. The escrow account must be opened with a bank in the PRC due to foreign exchange regulations.