By King & Wood Mallesons’ Banking & Finance Group
On 28 April 2013, SAFE promulgated the Administrative Measures for the Registration of Foreign Debt and an appendix thereto, the Operational Guidelines for the Registration of Foreign Debt (“New Rules on Foreign Debt”). Under the New Rules on Foreign Debt, borrowers are administered as three different groups: government finance agencies, banks, and non-bank borrowers. The New Rules on Foreign Debt have abolished some of the foreign debt approval requirements, clarified previous uncertainties in the practice of foreign debt registration and administration, and consolidated previous regulations on foreign debt registration and administration. The New Rules on Foreign Debt will come into effect on 13 March 2013.
The key changes in the New Rules on Foreign Debt are as follows:
- Abolishment of Some Foreign Debt Approval Requirements: The New Rules on Foreign Debt have simplified procedures for foreign debt registration. Non-bank borrowers are still required to register foreign debt with their local SAFE; however, it is no longer necessary to obtain approval from SAFE to open a designated account for foreign debt, and they are not required to register each drawdown of foreign debt, and carry out approval formalities for conversion of loan proceeds into RMB and repayment of principal and interests. Instead, after the foreign debt registration, non-bank borrowers may open account, make drawdown, conversion and repayment with the account banks directly.
- Clarification on Conversion of Proceeds of Foreign Debt: The New Rules on Foreign Debt explicitly provide that proceeds of foreign debt borrowed by foreign invested 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.
- Refinement of Conditions for FIEs to Borrow Foreign Debt: The New Rules on Foreign Debt have reiterated that foreign debt borrowed by FIEs shall continue to be subject to the quota of “foreign debt borrowing gap” (i.e. the gap between the total investment and registered capital of an FIE); meanwhile, the New Rules on Foreign Debt provide further clarification on the conditions that FIEs’ borrowing foreign debt are required to satisfy, for example: (1) when borrowing foreign debt, the foreign shareholder should have made its capital injection in compliance with the relevant provisions of the capital contribution contract and articles of association, and (2) the actual quota for foreign debt that can be borrowed is equal to the ratio of the foreign shareholder’s paid-in registered capital multiplied by its foreign debt borrowing gap.
- Extension or Refinancing Will Not Take Up Foreign Debt Quota: The New Rules on Foreign Debt provide that in the case of an extension or refinancing of medium- or long-term foreign debt borrowed by an FIE, provided that there is no increase in the amount of its existing foreign debt and no foreign exchange conversion, its foreign debt borrowing gap will not be taken up. This breakthrough provides a feasible approach for FIEs to extend their existing foreign debt or do refinancing.
- Borrowing by Offshore Unincorporated Branches: Pursuant to the New Rules on Foreign Debt, loans borrowed from offshore institutions and individuals by an offshore unincorporated branch of an onshore bank shall not be subject to foreign debt quota management or be counted as foreign debts for statistics purpose – this significantly simplifies the formalities for onshore banks’ offshore branch to raise funds or issue bonds offshore. Loans borrowed from offshore institutions and individuals by an offshore unincorporated branch of an entity other than an onshore bank shall be subject to foreign debt quota but not counted as foreign debts for statistics purpose.