SAFE Issues New Regulations on Cross-Border Security
On May 12, State Administration of Foreign Exchange (“SAFE”) issued Regulations on Cross-Border Security as well as its Implementation Guidelines (the “Regulations”). The Regulations has become effective on June 1.
By comparing with previous laws and regulations on cross-border security, the major points of the Regulations can be summarized as follows:
Definition of the Cross-Border Security
According to the Regulations, the Cross-Border Security can be divided into following three types:
1) cross-border security provided by an onshore security provider for a debt owed by an offshore debtor to an offshore creditor (neibaowaidai or 内保外贷 in Chinese);
Under this structure, banks and non-bank financial institutions with qualifications of operating relevant security in accordance with relevant rules can be the cross-border provider. Besides, onshore individuals may also refer to the non-bank financial institution as reference to provide neibaowaidai as guarantor. The fund obtained under the neibaowaidai structure, can only be used in relevant expense within the scope of normal operation of debtor. Such fund cannot be repatriated, whether directly or indirectly, from offshore to onshore.
2) cross-border security provided by an offshore security provider for a debt owed by an onshore debtor to an onshore creditor (waibaoneidai or 外保内贷 in Chinese);
Under this structure, onshore non-financial institutions may accept security from offshore institutions or individuals when such institutions get a loan or obtain committed credit facility from onshore financial institutions, on the premises that such institutions meet all the following conditions: 1) the debtor is non-financial institution registered onshore; b) the creditor is financial institution registered onshore; c) the security subject provided by the said financial institution is loan in RMB or foreign currency (entrusted loans excluded), or committed credit facility; and d) the form of the security must comply with onshore and offshore laws and regulations.
3) cross-border security other than the two types abovementioned.
Unlike the two types abovementioned, this type of cross-border security does not require registration or recordal of cross-border security agreement at the Bureau of Foreign Exchange unless specified by the SAFE otherwise. However, such security still needs to be in compliance with rules relating to fields, such as foreign bond, direct investment and securities investment etc.
Simplification of Management Procedures
The Regulations removes the prior review and approval procedures and takes post-event registration as the main management method instead. For example, it eliminates procedures, such as prior review and approval, approval of performing the security and most of qualification requirements. It also removes requirements on equity relationship existed between guarantor and guaranteed person unless specified otherwise and clarifies that individuals may provide security under the neibaowaidai and waibaoneidai structure. In addition, the Regulations further specifies that the failure to carry out any approval, registration or recordal of cross-border security will not impact on validity of the security agreement.
Performance of Security
When performing the security, there is no need to get any prior review or approval from the SAFE. In case it forms external debt after performing the security, the party concerned shall carry out registration of the external debt in accordance with relevant rules.
Under the waibaoneidai structure, after performance of the security by offshore security provider, the debt owed to the offshore security provider by the onshore debtor shall not exceed one time of the net value of the debtor.
Cross-Border Security Interest
According to the Regulations, the SAFE only regulates the foreign exchange matters in capital project that involves cross-border security and does not review the legality of the security interest established by parties concerned. Such parties shall confirm that the guarantee agreement is in compliance with relevant onshore and offshore laws and regulations by themselves.
If security provider and creditor belong to both inside and outside China, or, registration place of security interest (or property location, income resource) and any one of the security provider and the creditor belong to both inside and outside China, the security provider or the debtor may directly applies to onshore bank when such party applies for remitting or collecting income of disposing the guaranteed property. Besides, In case providing the security interest constitutes neibaowaidai or waibaoneidai, it shall carry out registration procedures in accordance with relevant rules.
Impact on Practice
The issuance of the Regulations is a breakthrough made by the SAFE with respect to management of cross-border security in the background of streamline administration and institute decentralization as well as further opening capital account. Since it simplifies supervision and administration procedures on registering cross-border security by onshore entities, it will greatly enhances convenience of cross-border security and benefits Chinese entities to finance for oversea project or merger. For example, in the past, it was common for an onshore parent company to provide a disguised form of security by signing a “Keep Well Agreement” to commit not to assign subsidiary company’s shares to protect interest of bond investor for oversea financing or bond issuing; however, the enforceability of such agreement is in question since it lacks of legal practice and definition in laws and regulations in China. Now, the onshore parent company may solve this problem by taking a cross-border security under the neibaowaidai structure or other types of cross-border security in accordance with the Regulations.
In fact, in less than a month after the implementation of the Regulations, there has been a successful case of overseas financing by an onshore entity in accordance with the Regulations already. On June 25, Greenland Group issued a senior note amount to 1 billion USD for investment of oversea project through its wholly owned oversea subsidiary company, Greenland Global Investment Limited, in Hong Kong, and Greenland Group is the security provider by the way of cross-border security. This is the first case that an onshore entity directly providing cross-border security for bond issuance of oversea subsidiary thereof after the implementation of the Regulations by the SAFE. By this way, it can protect the interest of the oversea bond holder better than the way of signing the said Keep Well Agreement in the past. More importantly, it can help Chinese entities reduce financing cost and timely seize the opportunity of oversea acquisition.
ABOUT THE AUTHOR: Fei Dang
Fei Dang is an Associate with MMLC.
Copyright MMLC Group
More information about MMLC Group
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.