On 13 March 2014, China Banking Regulatory Commission (CBRC) promulgated the newly revised Administrative Measures of the Financial Leasing Companies (Measures). Based on the current needs for the reform and development of financial leasing industry, the Measures lowers the entry threshold, which will be beneficial for various types of capital entering into financial leasing industry and break up the industry monopoly by banks. The Measures also expands the business scope of the financial lease companies and meanwhile strengthen shareholders’ sense of risk responsibility. The main highlights of the amendments to the Measures are as follows:
1. Relaxing entry threshold of financial leasing companies
The Measures no longer distinguishes a principle investor from general investors, and the requirement for the principle investor of holding 50% or more of the equity is abolished. All the following five types of qualified institutions may set up a financial leasing company as promoters:
- A commercial bank registered within the territory of China which has the qualification of independent legal person
- A commercial bank registered outside the territory of China which has the qualification of independent legal person
- A large enterprise registered in China, of which the main business is manufacturing products suitable for the financial leasing transactions
- A finance leasing company registered outside the territory of China
- Other domestic legal entities and overseas financial institutions that are qualified under the specified conditions and are acknowledged by the CBRC
The Measures also provides that at least one qualified commercial bank, manufacturing enterprise or overseas financial leasing company shall be the promoter which holds 30% or more equity in a financial leasing company.
The principal investor system has always been the threshold for setting up a financial leasing company, which largely restricted the development of financial leasing industry. According to the Measures, the principal investor system is replaced by promoter system, which lowers the entry barriers and creates more opportunities and possibilities for foreign and private capital to participate in the financial leasing industry.
2. Expanding business scope of Financial leasing Companies
Set out below are new financing channels provided by the Measures to financial leasing companies. As a result, financial leasing companies, besides the leasing business itself, have more finance features, which are expected to have positive impacts on the long-term development of financial leasing companies.
- Engaging in acquiring financial leasing assets and investing in fixed income securities, leading to more efficient use of funds.
- Taking three-month or longer term deposits from non-banking shareholders, as opposed to one year or above under the previous regime, lowering the conditions of seeking financial support from the shareholders.
- Engaging in asset securitization which will probably become one of the regular financing tools of financial leasing companies.
- Modifying “issuance of financial bonds” to “issuance of bonds”, relaxing the restrictions on the varieties of the bond products.
3. Strengthening shareholders’ sense of risk responsibility
The Measures provides the promoters shall undertake in the articles of association to provide liquidity support when the company has any payment difficulty and supplement the capital of the company if any operation loss results in a deficit in the company’s capital so as to keep its steady business operation.
From the perspective of shareholders’ limited liabilities under the PRC Company Law, it seems contradict to the rule of limited liability that the Measures requires shareholders to give the company liquidity support. However, considering the huge risks in financial leasing transactions, such provision aims to strengthen the shareholders’ sense of responsibility and protect the counterparty of transactions. Nevertheless, the Measures is silent on how exactly such liquidity support should be provided by promoters, which brings uncertainty to the practice.
4. The Act allow the Financial Leasing Companies to set up subsidiary Companies
Under the Measures, a financial leasing company, upon approval of the CBRC, is permitted to set up branches and subsidiaries. The specific conditions for the set up will be separately made by the CBRC.
Allowing financial leasing companies to set up branches and subsidiaries is of great significance. From a legal point of view, setting up branches and subsidiaries of a company is an important way to its cross-regional business and a basis for its development. Compared to a branch, a subsidiary has a more important role, as its status of an independent legal entity will serve risk isolation to its parent company and as a result, a financial leasing company will not be affected by the business risks of its subsidiaries.
In recent years, the rapid development of financial leasing industry is the essential background of the new Measures, which aims to cater the requirements of future development of the industry and provides a better legal basis to all kinds of capitals including overseas and private capital to become better involved in the industry.