In January 2009, China's State Administration of Industry and Commerce issued the Rules on the Registration of Share Investment as Capital Contribution ("Rules"), which will go into effect on March 1, 2009. "Share investment as contributions to capital" means the investment of a company through an investor's shares of another company. The Rules will facilitate the share investment and improve the efficiency of its use.
According to China's Company Law, investors can hold shares of a company through contributions of cash, along with non-monetary properties which can be assessed on the basis of cash and can also be legally transferred. One such non-monetary property is an investor's shares of another company.
The Rules are applicable to any shares which are held in a Chinese company and are also used as share investment in other Chinese companies. Shares which qualify for investment as contributions to capital must have undisputed and unencumbered ownership, as well as legal right to transfer. An investor's shares of another company do not qualify for share investment, if any of the following applies: 1) the registered capital of that company has not been paid off; 2) those shares have been secured; 3) those shares have been judicially frozen; 4) the certificate of incorporation of that company prohibits the transfer of shares; or 5) relevant laws, regulations or rules have been violated.
The total amount of share investment and other non-monetary properties investment being used as contributions to capital in an invested company shall not exceed 70% of that company's registered capital. Share investment shall be appraised by a licensed appraisal firm. With regard to a newly established company, under the Rules the investor's shares of another company must be transferred to the newly-established company within one year after it is established. With respect to the increment of registered capital of a previously-established company, those shares must be transferred to that company before its application for the modification of registered capital.