Alert – China introduces new measures for debt-for-equity swaps
28 November 2011
On 23 November 2011, the State Administration of Industry & Commerce of the People's Republic of China published the Measures on the Administration of the Registration of Company Debt-for-Equity Swap which will come into force on 1 January 2012.
The Measures aim to assist Chinese enterprises in addressing capital contribution problems caused by the international financial crisis by facilitating their debt restructuring and enhancing their financing capacity.
The following debts can be swapped for equity under the Measures:
- Contractual debts arising in the course of business where the creditor has already performed its obligations, where the debt-for-equity swap is not prohibited under the law or by the debtor's articles of association. For the purpose of the swap, the creditor and the debtor must sign an undertaking to warrant that the debts to be swapped comply fully with the foregoing requirements.
- Debts confirmed by a court judgment.
- Debts included in a reorganisation plan or settlement agreement for an insolvent company as approved by the court.
Government approvals must be obtained for certain debt-for-equity swaps — especially for foreign invested enterprises for which any change of registered capital requires the approval of the original approval authority.
Because the debt-for-equity swap is classified as a non-monetary capital contribution, the debts must be valued by a qualified valuer and, together with other capital contributions in kind, must not exceed 70% of the registered capital of the company.
Like other capital contributions, debt-for-equity swaps must be verified by a qualified capital verification institute, which will examine how the debts arose, the appraised value of the debts, and how the swap has been conducted (eg, whether a debt-for-equity agreement has been signed, how the debts are booked after the swap).
Since the Companies Law was amended in 2005, debt-for-equity swaps have become a permissible method of capital contribution in theory, and local governments in Beijing, Tianjin, Chongqing and Zhejiang Province have issued trial measures to allow debt-for-equity swap in practice.
The new Measures are the first nationwide regulation to deal with this issue. When they come into force on 1 January 2012, foreign investors will have one more option for making a capital contribution to their Chinese businesses.