The State Administration of Foreign Exchange of the PRC (“SAFE”) formally released on 19 May 2014 the Foreign Exchange Administration Rules on Cross-border Security (《跨境担保外汇管理规定》) together with its operation guidelines (the “New Rules”). The New Rules will come into effect on 1 June 2014. The New Rules reform the regulatory regime for outbound and inbound security. We issued a client alert in March 2014 commenting on the final draft of the New Rules (See our China Bank Finance Client Alert issued in March 2014).
From 1 June 2014, PRC companies will be able to provide guarantee/security in favour of an offshore entity (“Outbound Security”) without the need to obtain any approval or quota from SAFE. Any Outbound Security is still subject to the requirement that it must be registered with SAFE within 15 days of its execution, but such registration will no longer be a condition to the validity of the security interest being created.
The New Rules removed the restriction set out in the final draft of the New Rules for the aggregate amount of Outbound Security provided by a financial institution not to exceed “50% of the audited amount of its net assets”. In the New Rules, this is now a matter subject to the discretion of the relevant industry regulators (e.g. for commercial banks, People’s Bank of China and China Banking Regulatory Commission).
However, the “No Flow-Back of Loan Proceeds” restrictions remain. Unless special approval from SAFE is obtained, proceeds of an offshore loan supported by Outbound Security cannot be used for (1) equity investment or shareholder loan into PRC entities, (2) refinancing existing debt which was originally used for equity investment or shareholder loan into PRC entities, (3) acquisition of an offshore company/group which has more than 50% of its assets in the PRC, or (4) initial payment for a trade transaction in respect of goods or services to a PRC entity which (x) is more than US$1,000,000 and exceed 30% of the total price for such goods or service, and (y) is made at a time more than 1 year earlier than the date of delivery of goods or services.
We will issue further updates once the New Rules are implemented.
Appendix: Basic Financing Structures Before and After 1 June 2014
Click here to view table.