The Way for Foreign Investments Entering Pawn Industry in China
December 2, 2012 By Amaris Law
In August 2012, the Ministry of Commerce of PRC (COFCOM) has issued the Regulatory Requirements on the Pawn Industry (draft) for collecting opinions from the public (“Requirements”). Such Requirements tighten the control on the regulations of Pawn Industry. However, in view of the rapid growth of such an industry in recent years, this article will discuss the chance, feasibility and way of foreign investments entering this industry and sharing its prosperity.
1. Legal requirements of the pawn industry in China
The Measures for the Administration of Pawning (issued on 2005, “Measures”) and the Requirements constitute the entrance requirements for pawning company as follows:
The major threshold of entering the pawn industry in China includes:
a. The holding shareholder of the pawn company should be a legal entity and all its natural person shareholders, if any, should be Chinese citizens over 18 years old with good credit and no records of crimes.
b. The corporation should attain the Licence of Pawn Business approved by the Ministry of Commerce.
c. The registered capital should exceed 3,000,000 RMB; for companies involved in real estate pawn business, the minimum amount of registered capital is 5,000,000 RMB; and for those engaged in business of pawning property rights, the least amount is 10,000,000 RMB.
The financing issues of a pawn company:
a. The legal source of corporate capital is restricted to:
ⅰ. Registered capital approved by relevant authorities;
ⅱ. Operating surplus within the pawn company;
ⅲ. Loans and mortgages from business banks.
b. Regulations have required that the legitimacy of source of capital should be strictly verified by local authorities to avoid borrowed funds or illegal funds. Among other things, there is an annual verification focused on the corporate funds, shareholders and business within the year.
2. Model of VIE (Variable interest entities)
In China, there are a number of industries (not yet monopolized) that are solely available to domestic investments, or in other words, in which foreign investments are banned for entry in light of government policies. Despite that, foreign investments still have a chance to enter those industries by applying a somewhat complicated technical method called VIE, which will enable them to make some profits from the business even before the open-up of the industry and take the lead or at least be at an advantage once the policy allows foreign investments to enter.
Typical VIE has been used by some Chinese corporations in those industries that intend to be listed overseas without violating related rules and regulations. Usually, the domestic company in such an industry owned by the Chinese investors remains in business as before. The same Chinese investors then set up an offshore company (most likely in Hong Kong or BVI). Back in China, the offshore company invests and establishes a WFOE (Wholly Foreign Owned Enterprise). By forming a series of agreements between the WFOE and the domestic company, the investors can control the domestic company via WFOE and attract foreign investments. For instance, renowned Chinese network corporation sina dot com has been admired as a success of the VIE pattern.
When it comes to foreign investments that wish to enter the pawn industry in China, the only difference from the typical VIE is that foreign investors will control the domestic pawn company with the agreements between the WFOE and the domestic company in lieu of Chinese investors.
Through M&A (Mergers and Acquisitions), foreign investors get control of a domestic pawn company (better with medium size or small company). Instead of violating the policies, foreign investors will be controlling the company indirectly, that is some Chinese investors will be directly in charge as their agents. Meanwhile, foreign investors establish the offshore corporation in Hong Kong or BVI and its WFOE in China. Similarly, there is a control agreement between the domestic pawn company and the WFOE as illustrated as appendix-1.
3. Details about the agreement and source of funds
The agreements are usually composed of three parts:
a. Management
In the agreement, the WFOE, often as a consulting company, is entitled to manage the entire pawn business in China, fully in charge of all affairs and issues in the domestic company.
b. Profit transfer
One of the major objectives of this VIE is to make profits for the parent company from the pawn business in China. Therefore, terms on how to transfer the profits are included in this agreement without question. The agreement usually provides that the pawn company should pay all its earnings and profits to the WFOE as management cost, consulting fees, service charge and so on.
c. Financing
Through the agreement, the WFOE serve as a source of capital for the pawn business, in the form of royalties, mortgages, bank loans and so on.
For the domestic pawn company, no great development can be achieved in its business without good amounts of investments or funds. With experienced foreign pawn corporations as investors as well as management know-how and fund suppliers, the domestic pawn business is bound to achieve success. In this VIE model; there are two main sources of corporate capital. The first is the fund provided in the agreement such as bank loans, mortgages and royalties. The second should be the borrowed fund from the foreign investors to their Chinese counterparts. According to the industry regulations, there is no limit on the first source but the second one bares some risk in the annual verification and thereby should be cautiously dealt with.
We have to say, as the COFCOM adopts the stringent control over the pawn industry, any material or possible violation of the Regulation or Rules may lead to the disaster to the investment. As such, it is recommendable to take the professional advice when foreign investors conducting investment and operations in china.
ABOUT THE AUTHOR: Mr. Alan King, （金益亭） Partner and Attorney at Law with Zhongyin Law Firm and Mr. Guo Shen Yao (顾申尧）
Mr. Alan King, （金益亭） Partner and Attorney at Law with Zhongyin Law Firm. He has rich experience in foreign investment, foreign-related legal practice, mergers & acquisitions, corporate compliance, corporate financing.
Copyright Amaris Law
More information about Amaris Law
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
The Measures for the Administration of Pawning (issued on 2005, “Measures”) and the Requirements constitute the entrance requirements for pawning company as follows:
The major threshold of entering the pawn industry in China includes:
a. The holding shareholder of the pawn company should be a legal entity and all its natural person shareholders, if any, should be Chinese citizens over 18 years old with good credit and no records of crimes.
b. The corporation should attain the Licence of Pawn Business approved by the Ministry of Commerce.
c. The registered capital should exceed 3,000,000 RMB; for companies involved in real estate pawn business, the minimum amount of registered capital is 5,000,000 RMB; and for those engaged in business of pawning property rights, the least amount is 10,000,000 RMB.
The financing issues of a pawn company:
a. The legal source of corporate capital is restricted to:
ⅰ. Registered capital approved by relevant authorities;
ⅱ. Operating surplus within the pawn company;
ⅲ. Loans and mortgages from business banks.
b. Regulations have required that the legitimacy of source of capital should be strictly verified by local authorities to avoid borrowed funds or illegal funds. Among other things, there is an annual verification focused on the corporate funds, shareholders and business within the year.
2. Model of VIE (Variable interest entities)
In China, there are a number of industries (not yet monopolized) that are solely available to domestic investments, or in other words, in which foreign investments are banned for entry in light of government policies. Despite that, foreign investments still have a chance to enter those industries by applying a somewhat complicated technical method called VIE, which will enable them to make some profits from the business even before the open-up of the industry and take the lead or at least be at an advantage once the policy allows foreign investments to enter.
Typical VIE has been used by some Chinese corporations in those industries that intend to be listed overseas without violating related rules and regulations. Usually, the domestic company in such an industry owned by the Chinese investors remains in business as before. The same Chinese investors then set up an offshore company (most likely in Hong Kong or BVI). Back in China, the offshore company invests and establishes a WFOE (Wholly Foreign Owned Enterprise). By forming a series of agreements between the WFOE and the domestic company, the investors can control the domestic company via WFOE and attract foreign investments. For instance, renowned Chinese network corporation sina dot com has been admired as a success of the VIE pattern.
When it comes to foreign investments that wish to enter the pawn industry in China, the only difference from the typical VIE is that foreign investors will control the domestic pawn company with the agreements between the WFOE and the domestic company in lieu of Chinese investors.
Through M&A (Mergers and Acquisitions), foreign investors get control of a domestic pawn company (better with medium size or small company). Instead of violating the policies, foreign investors will be controlling the company indirectly, that is some Chinese investors will be directly in charge as their agents. Meanwhile, foreign investors establish the offshore corporation in Hong Kong or BVI and its WFOE in China. Similarly, there is a control agreement between the domestic pawn company and the WFOE as illustrated as appendix-1.
3. Details about the agreement and source of funds
The agreements are usually composed of three parts:
a. Management
In the agreement, the WFOE, often as a consulting company, is entitled to manage the entire pawn business in China, fully in charge of all affairs and issues in the domestic company.
b. Profit transfer
One of the major objectives of this VIE is to make profits for the parent company from the pawn business in China. Therefore, terms on how to transfer the profits are included in this agreement without question. The agreement usually provides that the pawn company should pay all its earnings and profits to the WFOE as management cost, consulting fees, service charge and so on.
c. Financing
Through the agreement, the WFOE serve as a source of capital for the pawn business, in the form of royalties, mortgages, bank loans and so on.
For the domestic pawn company, no great development can be achieved in its business without good amounts of investments or funds. With experienced foreign pawn corporations as investors as well as management know-how and fund suppliers, the domestic pawn business is bound to achieve success. In this VIE model; there are two main sources of corporate capital. The first is the fund provided in the agreement such as bank loans, mortgages and royalties. The second should be the borrowed fund from the foreign investors to their Chinese counterparts. According to the industry regulations, there is no limit on the first source but the second one bares some risk in the annual verification and thereby should be cautiously dealt with.
We have to say, as the COFCOM adopts the stringent control over the pawn industry, any material or possible violation of the Regulation or Rules may lead to the disaster to the investment. As such, it is recommendable to take the professional advice when foreign investors conducting investment and operations in china.
ABOUT THE AUTHOR: Mr. Alan King, （金益亭） Partner and Attorney at Law with Zhongyin Law Firm and Mr. Guo Shen Yao (顾申尧）
Mr. Alan King, （金益亭） Partner and Attorney at Law with Zhongyin Law Firm. He has rich experience in foreign investment, foreign-related legal practice, mergers & acquisitions, corporate compliance, corporate financing.
Copyright Amaris Law
More information about Amaris Law
View all articles published by Amaris Law
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
