SAFE publishes new rules encouraging and guiding private capital for outbound investments
On 15th June 2012, the State Administration of Foreign Exchange (SAFE) issued the Circular on Relevant Issues Concerning Foreign Exchange Regulation Encouraging and Guiding Private Investment (Circular). The Circular is based on, and designed to implement, the Opinion of the State Council on Encouraging and Guiding the Healthy Development of Private Capital in China issued in 2010, with the view to encouraging private capital in China to conduct outbound investments. The Circular will come into effect on 1st July 2012.
The Circular has simplified the regulatory procedures that PRC investors need to fulfill in order to provide financing to offshore entities (the Invested Entities) in which the PRC investors have invested. More importantly the Circular has expressly, for the first time, permitted PRC individuals to provide foreign security (including guarantee, mortgage, pledge and other security measures as permitted under PRC law) over his/her assets for the obligations of Invested Entities under any offshore financing arrangements (Personal Foreign Security). In particular the Circular provides that:
- a PRC individual may provide Personal Foreign Security when the PRC corporate shareholder of the Invested Entity also provides security (Corporate Foreign Security) for the same offshore debts of the Invested Entity;
- the PRC individual shall entrust the PRC corporate shareholder to apply to the local SAFE (in the place where the PRC corporate shareholder is located) in respect of the Personal Foreign Security. The logic of this is that such application will be made together with the PRC corporate shareholder’s own application to SAFE for an approval to the Corporate Foreign Security;
- in the case where local SAFE approves the Corporate Foreign Security, the Personal Foreign Security will be registered with SAFE simultaneously with the registration of the Corporate Foreign Security;
- the local SAFE will not conduct any substantial review of the qualification of the security provider, security methods or scope of the security assets in respect of the Personal Foreign Security; and
- upon enforcement of the Personal Foreign Security, the PRC individual shall handle the foreign exchange control procedures with SAFE by providing documents establishing that the security has become enforceable.
Before the Circular, the effectiveness of the personal guarantee given by a PRC individual in cross-border banking transactions was questionable and therefore the guarantee was primarily treated as a “comfort” only. The Circular has made Personal Foreign Security a legitimate way of providing foreign security. This should be of particular assistance to Chinese private companies and investors (as opposed to SOEs) in their search to attract financing for their overseas operations.
For further information, please contact Sun Hong.
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