By King & Wood Mallesons’ Banking Group
The China Banking Regulatory Commission (“CBRC”) released the newly amended Administrative Measures for Financial Leasing Companies (Order of China Banking Regulatory Commission  No. 3) (the “New Measures“) on March 13, 2014. Comparing with the amended version in 2007 (the “Old Measures”), the New Measures mainly revise the provisions concerning the market-entry requirements, business scope, operation rules, supervision and administration of financial leasing companies. The New Measures came into effect as of the date of promulgation while the Old Measures ceased to be effective on the same day.
Comparing with the Old Measures, the New Measures lower the entry barriers for setting up a financial leasing company and encourage capitals from various systems of ownership to enter into the financial leasing industry. The New Measures also broaden the financing channels for financial leasing companies by extending their permitted business scope, which is conducive to relieving the capital pressure of financial leasing companies. Meanwhile the New Measures set forth a more improved regulatory system which requires financial leasing companies to strictly manage and control the risks by both internal governance and external supervision. The highlights of the New Measures mainly are:
- Switching from “Chief Investor System” to “Initiator System”. The Old Measures differentiate between the “chief investor” and the “ordinary investor”, stipulating that the chief investor shall be the applicant when applying to establish a financial leasing company with the CBRC, while the New Measures abolish such a division and provide that anyone that falls within the five types of institutions (i.e. domestic and overseas commercial banks, domestic large manufacturers, overseas financial leasing companies, other domestic institutions and other overseas finance institutions) prescribed in the New Measures and that meets the relevant criterion can apply to establish a financial leasing company as an initiator. Moreover, the New Measures require at least one eligible commercial bank, domestic large manufacturer or overseas financial leasing company among the initiators having an investment proportion no less than 30%. Besides, the New Measures list some circumstances where an institution is not eligible to be an initiator of financial leasing companies.
- Extending the business scope of financial leasing companies. In addition to the eleven kinds of permitted business items for financial leasing companies provided in the Old Measures, the New Measures extend the scope of the assignees of financial leasing assets, reduce the requirements for receiving deposits from non-bank shareholders, cancel the “foreign exchange” restrictions of the overseas borrowings and add securities investment with constant return as a newly permitted business item. Meanwhile, the New Measures set up a classified management system, where any well-operated and eligible financial leasing companies can, with the approval from CBRC, carry out upgrading businesses in addition to the basic ones. Such upgrading businesses include issuing bonds, establishing project companies in domestic tax bonded zones for financial leasing business, assets securitization and providing security for its controlling subsidiaries and project companies. It is noteworthy that that in the lately released Administration of Foreign Exchange for Cross-border Guarantee by State Administration of Foreign Exchange (Draft for Comments), it is provided that the financing institutions providing securities for external debt shall be qualified to do so, while the New Measures explicitly set forth requirements for financial leasing company engaged in business of providing securities for its controlling subsidiaries and project companies. If the Administration of Foreign Exchange for Cross-border Guarantee was implemented at a later stage, it will be well connected with the New Measures in this aspect.
- Enhancing the shareholders’ sense of risks and duties. The New Measures require that the initiators shall agree in the articles of association of the financial leasing company that when the financial leasing company encounters solvency problems, its shareholders shall provide liquidity support; when operating losses takes up the registered capital, the shareholders shall timely make up the shortfall. Such provision is conducive to urging financial leasing companies and their shareholders to enhancing their self-aid and self-recovery ability and preventing the risks from over-spilling.
- Improving the operation rules and prudential supervision requirements. The provisions in the Old Measures concerning operation rules, supervision and management are relatively simple, which mainly refer to the internal governance, connected transactions, sale and leaseback activities and accounting etc. The New Measures incorporate improved provisions concerning the operation rules, emphasize the importance of the title management and valuation of leased property and strengthen the administration of the leased property and its unsecured residual value. Moreover, the New Measures perfect the prudential supervision and management requirements concerning the capital adequacy ratio, connected transactions ratio and concentration ratio.
- Permitting financial leasing companies to set up subsidiaries. The Old Measures allow financial leasing companies to establish branches with the approval of CBRC. The New Measures, on the other hand, provides that financial leasing companies are permitted to establish branches and subsidiaries with CBRC’s approval. Such a new change adapts to the need of the financial leasing market development and is bound to boost financial leasing companies’ appetite and presence in certain industries (e.g. aviation and shipping).
The New Measures are a positive response to the need of the latest development in the financial leasing market and are conducive to encouraging and guiding capitals from various systems of ownership to flow into the financial leasing industry and promoting the steady development of the financial leasing industry.
However, we have also noticed that some parts of the New Measures remain to be detailed. For instance, the New Measures provides that the specific requirements for the establishment of branches and subsidiaries will be separately formulated by CBRC, but the only regulation to follow so far is the Notice of the China Banking Regulatory Commission on Issues concerning Financial Leasing Companies’ Establishment of Project Companies in Domestic Bonded Zones to Carry Out Financial Leasing Business (the “Notice”) published by CBRC in 2010. It remains to be further clarified by CBRC on whether the related provisions in the Notice (such as those concerning the qualification of the parent company and the business scope of the project company etc.) should be in line with those of the New Measures and whether the establishment of subsidiaries and branches can be extended from domestic tax bonded zones to abroad. Furthermore, it is prescribed in the New Measures that relevant CBRC regulations shall be abided by a financial leasing company intending to carry out assets securitization business, however, there still no explicit regulations and implementing rules for a financial leasing company to follow in practice. With respect to these issues, we will keep tracking the impact of the New Measures on financial leasing business. Subsequent newsletters will be delivered once available.
Beijing: Ma Feng: firstname.lastname@example.org; Jay Zhou: email@example.com
Shanghai: Stanley Zhou：firstname.lastname@example.org