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What types of debt securities offerings are typical, and how active is the market?
The most typical type of debt securities offering in China is within the inter-bank bond market. Attached to the China Foreign Exchange Trading Center (also known as the National Interbank Lending Center) and the China Central Depository and Clearing Co Ltd (CCDC), the inter-bank bond market is a bond purchase and repo market where various financial institutions participate, including merchant banks, rural credit cooperatives, insurance companies and securities companies. The inter-bank bond market makes up a large part of China’s bond market and is its principal component. Measured from the number of bonds in custody, both the amount of bond storage and bond trading in the inter-bank bond market encompass more than 90 per cent of China’s bond market.
Describe the general regime for debt securities offerings.
The legal framework of the inter-bank bond market is set out below.
Laws enacted by the National People’s Congress, including:
- the securities laws of the People’s Republic of China;
- the Law on the People’s Bank of China;
- the Guarantee Law; and
- the Property Law, among others.
Regulations issued by the People’s Bank of China, including:
- Notice on Issues Regarding Financial Institutions Joining the National Inter-bank Bond Market, Administrative Measures for Debt Financing Instruments of Non-financial Enterprises in the Inter-bank Bond Market;
- Rules for Checking the Circulation of Bond Transaction in the Nationwide Inter-bank Bond Market, Notice on the Listing of National Inter-bank Bonds, Notice on the Issuance, Trading, Registration and Escrow of Corporate Bonds in the Inter-bank Bond Market; and
- Rules on the Issuance of Subordinated Bonds by Commercial Banks, Interim Measures for the Issuance of Renminbi Bonds by International Development Institutions (2010 Revision) and Measures for the Administration of the Issuance of Financial Bonds in the National Inter-bank Bond Market, among others.
Self-regulatory rules and guidelines issued by the National Association of Financial Market Institutional Investors (NAFMII), including:
- Self-regulatory Rules for Bond Transactions in the Inter-bank Bond Market;
- Guidelines for Commercial Paper Business of Non-financial Enterprises in the Inter-bank Bond Market;
- Guidelines on Medium-term Notes Business of Non-financial Enterprises in the Inter-bank Bond Market;
- Rules for the Registration of Debt Financing Instruments of Non-financial Enterprises in the Inter-bank Bond Market;
- Rules for Information Disclosure on Debt Financing Instruments of Non-financial Enterprises in the Inter-bank Bond Market; and
- Rules on the Registration of Debt Financing Instruments of Non-financial Enterprises in the Inter-bank Bond Market, among others.
Filing and documentary requirements
General filing requirements
Give details of any filing requirements for public offerings of debt securities. Outline any requirements for debt securities that are not applicable to offerings of other securities.
For public offerings of debt securities, the enterprises should file the following registration documents to the Registration Office through the lead underwriter. The registration documents include:
- the registration report of debt financing instruments (attaching the resolutions of the authorised body in the ‘Constitutions of Association’ of the enterprise);
- a letter of recommendation from the lead underwriter and a letter of commitment from related intermediaries;
- the documents of debt financing instruments issuance that the enterprises plan to disclose; and
- other documents that prove the truthfulness, accuracy, completeness and timeliness of information disclosed by the enterprises and related intermediaries.
Generally, the registration report is not a necessary filing requirement. Exceptions include the resolutions of an authorised body in the Constitutions of Association of the enterprise. The two requirements mentioned above are not applicable to offerings of other securities.
In a public offering of debt securities, must the issuer produce a prospectus or similar documentation? What information must it contain?
A prospectus is a necessary part of the issuance documents in a public offering of debt securities. Generally speaking, a prospectus should include the following information: risk factors, details of the offer, use of proceeds, general information of the issuer, financial information of the issuer, guarantee of the bond, taxation, intermediaries and other institutions relating to the issuance.
Describe the drafting process for the offering document.
An issuer should prepare the following documents for the offering:
- a public announcement of issuance;
- a prospectus;
- a credit-rating report and arrangements for follow-up ratings;
- legal documentation; and
- audited financial statements of the past three years and up-to-date financial data.
Initial issuance of debt financing instruments should release the above documents at least five working days before the offering date. Enterprises with sequential issue of debt financing instruments should release the documents at least three working days before the offering.
The self-regulatory rules of the NAFMII give a general background of information disclosure during the bond offerings. One of the most helpful rules is the Rules for Information Disclosure on Debt Financing Instruments of Non-financial Enterprises in the Inter-bank Bond Market. It regulates information disclosure both made through issuance documents and within the duration of the debt financing instrument. Disclosure requirements cover financial information, company operation and debt defaulting, among others.
Similarly, for private offerings, enterprises should deliver registration documents to the registration office. The filing requirements are the same for public offerings (see question 3). One of the differences is that, for private offerings, the issuer reaches a targeted investment agreement with the potential investors before the offering.
Which key documents govern the terms and conditions of the debt securities? Who are the parties to such documents? How can such documents be accessed?
The offering circular and the prospectus give descriptions of the terms and conditions of the debt securities. They are executed and released by the issuer, and can be obtained through the China Money website (www.chinamoney.com.cn) and the China Bond website (www.chinabond.com.cn).
Does offering documentation require approval before publication? In what forms should it be available?
The issuance registration of debt financing instruments adopts the registration committee mechanism. The offering documentation, together with other registration documents, is subject to the review of the registration committee. The committee reserves the right to require explanation, demand additional materials to registration documents or disapprove the registration during the process of evaluation. Upon issuance, the offering documentation will be available on the China Money website and the China Bond website (see question 6).
Are public offerings of debt securities subject to review and authorisation? What is the time frame for approval? What are the restrictions imposed, if any, on the issuer and the underwriters during the review process?
The NAFMII is in charge of the review and issuance registration of debt financing instruments. The registration committee decides whether the issuance registration should be accepted. There should first be a pre-review by the registration office. One person carries out the pre-review and another carries out the double-checking. Within 20 working days, the person responsible for the pre-review issues a letter to suggest that the applicant enterprise add information to registration documents if necessary. Registration documents approved by both pre-reviewers are submitted to the registration meeting. The registration committee meets weekly - in principle, to review the documents and to issue one of the following opinions:
- acceptance of registration;
- conditional acceptance of registration; or
- deferred acceptance of registration.
The registration office delivers feedback to the enterprises within three working days if the opinion is conditional acceptance, and the enterprise or relevant intermediaries should submit supplementary materials within 10 working days after receipt.
On what grounds may the regulators refuse to approve a public offering of securities?
The offering of debt financing instruments observes the principles of good faith and self-regulation. Applicant enterprises should make information disclosures to the governing authorities in the proper manner. Information disclosures should be true and honest and should not contain any false presentations, misleading statements or major omissions. Applications that fail to observe the self-regulatory rules or fail to satisfy the issuance requirements are rejected by the NAFMII.
How do the rules differ for public and private offerings of debt securities? What types of exemptions from registration are available?
Public and private offerings have different investors. Thus public offerings have standard requirements for issuance while private offerings can be more flexible and self-regulatory, and are not subjected to the requirement that ‘the balanced issuing amount shall not exceed 40 per cent of the issuer’s net assets’. However, private offerings still need to register with the NAFMII, but the NAFMII only conducts a completeness check on the filing documents. In a private offering, the issuer reaches a targeted investor agreement with certain investors. The agreement lays down the disclosure standards and the disclosure is made to the targeted investors only. The price is fixed in a market-oriented manner, and credit rating is not compulsory.
Describe the public offering process for debt securities. How does the private offering process differ?
After the NAFMII sends the Notice for Registration Acceptance to the enterprises, the lead underwriter, together with the underwriting group, is in charge of the offering. The offering takes the form of either book building or bidding. The parties in a bidding usually include the issuer, the bidding participant and intermediaries. The issuer reaches a written agreement with the bidding participants and discloses the following information at least one day before the issuance:
- the method of issuance;
- the invitation for bids; and
- the list of the bidding participants.
The parties to a book building include the issuer, the lead underwriter, the bookrunner and intermediaries. The issuer discloses the price fixing rules, book building rules and processes in accordance with the prospectus and other relevant rules. Price enquiries are carried out before the issuance and a price range is fixed upon the enquiries. Investors make purchase applications according to the rules, while the bookrunner is in charge of the placement.
In the private offerings, the parties will include the issuer, the lead underwriter, the directed investors, intermediaries and the bookrunner (if any). The issuance takes either of the above forms.
What are the usual closing documents that the underwriters or the initial purchasers require in public and private offerings of debt securities from the issuer or third parties?
The usual closing documents include a credit-rating report and arrangements for follow-up ratings issued by credit-rating institutions, legal opinions issued by law firms and audited financial statements of the past three years issued by accounting firms, with up-to-date financial data.
What are the typical fees for listing debt securities on the principal exchanges?
Typical fees for listing debt securities within the inter-bank bond market include fees for intermediaries and other registration fees. The intermediaries usually are underwriters, law firms, credit-rating institutions and accounting firms.
Special debt instruments
How active is the market for special debt instruments, such as equity-linked notes, exchangeable or convertible debt, or other derivative products?
There are no special debt instruments in the inter-bank bond market. However, listing companies can issue convertible debts through major exchanges.
What rules apply to the offering of such special debt securities? Are there any accounting implications that the issuer should be aware of?
Convertible debts are debts issued by listing companies. Apart from the general rules applicable to bond issuance, they comply with the rules for issuance of stocks and are approved by the State Council’s securities regulatory authorities.
The following accounting requirements should be met to issue convertible debts:
- the weighted average yield rates of net asset for the past three years should not be lower than 6 per cent;
- after the present issuance, the balance of the accumulative corporate bonds should not exceed 40 per cent of the amount of net assets at the end of the latest accounting period; and
- the annual average amount of the distributable profits realised in the past three years should not be less than the annual amount of interests of the corporate bonds.
What determines whether securities are classed as debt or equity? What are the implications for instruments categorised as equity and not debt?
There are some major differences between equity securities and debt securities as in the following:
As a means of financing, most national or local public bodies and companies can issue debt securities, but equity securities can only be issued by joint-stock companies.
Stability of gains
As a way of investment, the gains from the two securities are different. Debt securities have fixed interest, while investors usually get uncertain incomes from equity securities.
Equity and debt securities reflect totally different legal relations. The debt securities reflect legal relations in debt and credit, but the equity securities reflect the ownership of the company in the investors.
Debt securities are general investments, whose trading turnover rate is lower than equity securities. Equity securities are not only an investment but also a major investment in the financial markets; although low security and high risk, they provide high expected revenues and attract more risk-oriented investors.
Transfer of private debt securities
Are there any transfer restrictions or other limitations imposed on privately offered debt securities? What are the typical contractual arrangements or regulatory safe harbours that allow the investors to transfer privately offered debt securities?
Relevant rules require that privately offered debt securities be transferred only among investors specified in the targeted investment agreement (see question 5). Institutions that provide registration, custody or transfer services for such instruments are obliged to report bond information to the NAFMII on a regular basis.
Are there special rules applicable to offering of debt securities by foreign issuers in your jurisdiction? Are there special rules for domestic issuers offering debt securities only outside your jurisdiction?
One of the main rules for offering of debt securities by foreign issuers in China is the Interim Measures for the Administration of the Issuance of Renminbi Bonds by International Development Institutions.
One of the main rules for domestic issuers offering debt securities only outside China is the Guiding Opinions of the State Planning Commission and People’s Bank of China on Further Strengthening the Management of Issuance of Foreign Debt (Opinions). According to the Opinions, issuance of foreign debts by domestic institutions is subject to the approval of the State Planning Commission, the People’s Bank of China, the State Council and relevant governing authorities, and qualified entities, are subject to a qualification review every two years.
In addition, two special rules govern the bond issuance by domestic institutions in Hong Kong: the Notice of the National Development and Reform Commission on Matters Concerning the Issue of Renminbi Bonds in the Hong Kong Special Administrative Region by Domestic Non-financial Institutions and the Interim Measures for the Administration of the Issuance of Renminbi Bonds in Hong Kong Special Administrative Region by Domestic Financial Institutions. According to the rules, bond issuance by financial institutions is subject to the approval of the National Development and Reform Commission, the People’s Bank of China and the State Council. However, non-financial institutions should apply directly to the Development and Reform Commissions for bond issuance.
Are there any arrangements with other jurisdictions to help foreign issuers access debt capital markets in your jurisdiction?
Apart from what is stated in the Interim Measures for the Administration of the Issuance of Renminbi Bonds by International Development Institutions, it is still difficult for foreign issuers to access the debt capital market in China. The government and relevant security exchanges are working hard to establish certain mechanisms for bond issuance by foreign companies.
What is the typical underwriting arrangement for public offerings of debt securities? How do the arrangements for private offerings of debt securities differ?
There are two types of underwriting arrangements in a public offering: firm commitment and best efforts. Firm commitment is typical in the inter-bank securities market. In a firm commitment, the underwriters purchase the securities from the issuer and then sell them to the public. The underwriters assume the risk that the securities cannot be sold to the public or can only be sold below the purchase price. The underwriters usually form a syndicate to spread the risk. The other underwriting arrangement often used is the best efforts arrangement. Instead of purchasing all the issued securities, the underwriters use their expertise to act as an intermediary to sell the securities, and earn the gross spread on what they sell.
In a private offering of debt securities, the underwriters assist the applicant enterprise in their registration with the NAFMII and look for qualified investors. The investors reach agreements with the issuer and purchase securities directly from the issuer.
How are underwriters regulated? Is approval required with respect to underwriting arrangements?
Various rules of the NAFMII provide relevant provisions relating to the behaviour of the underwriters. Some of the main rules include the Rules for Intermediate Service of Debt Financing Instruments of Non-financial Enterprises in the Inter-bank Bond Market and the Rules for the Self-regulatory Discipline of the Debt Financing Instruments of Non-financial Enterprises in the Inter-bank Bond Market.
According to the rules, underwriters assist the applicant enterprises in their offering process and observe the self-regulatory rules of the NAFMII, as well as other relevant laws and regulations governing the bonds and securities market. Both the NAFMII and the People’s Bank of China regulate and govern the inter-bank bond market and their participants. There are no specific approval requirements for underwriting arrangements, if the arrangements meet relevant legal requirements.
What are the key transaction execution issues in a public debt offering? How is the transaction settled?
The issuer signs the underwriting agreement with the underwriters. Before the issuance, the lead underwriters assist the issuer in their registration with the NAFMII, as well as relevant disclosure issues. After that, the issuer reaches a confirmation agreement with the underwriters on the interest rates and price of the debt securities. The issuer will also reach an agreement with certain registration and custody entities about relevant registration and custody issues.
The proceeds are usually received by the issuer in one of two ways: the bookrunner transfers the balance of proceeds excluding the underwriting costs to the bank account of the issuer at the payment date or the bookrunner transfers all the proceeds to the issuer at the payment date. The underwriting obligations cease once the issuer receives the proceeds.
How are public debt securities typically held and traded after an offering?
The regulatory rules require bond holders to appoint a bond registration, custody and settlement institution to hold their bonds. Bond holders open certain bond accounts in such institutions for the management of the bonds. The CCDC is such an institution, designated by the People’s Bank of China. It is in charge of the registration, custody and settlement of bonds in the inter-bank market.
Outstanding debt securities
Describe how issuers manage their outstanding debt securities.
The issuer usually repurchases the outstanding debt securities.
Regulation and liability
Are there any reporting obligations that are imposed after offering of debt securities? What information would be included in such reporting?
The main reporting obligations post-offering are found in the Rules for Information Disclosure on Debt Financing Instruments of Non-financial enterprises in the inter-bank bond market.
The enterprises continuously disclose the following information within the duration of the debt financing instrument:
- before 30 April of each year, companies must disclose annual financial statements and an audit report for the previous year;
- before 31 August of each year, companies must disclose their balance sheet, income statement and cash flow statement for the first half of the current year; and
- before 30 April and 31 October of each year, companies must disclose their balance sheet, income statement and cash flow statement of the first quarter and the third quarter of the current year.
Apart from the above, companies must disclose major issues that occur in the duration of debt financing instruments, which may affect their solvency. For example, major issues include:
- significant changes in business policies and business scope of the enterprises;
- significant losses of more than 10 per cent of the net assets;
- decisions for capital reduction, merger, division, dissolution and filing for bankruptcy; and
- involvement in major litigation, arbitration or severe administrative penalties.
Describe the liability regime related to debt securities offerings. What transaction participants, in addition to the issuer, are subject to liability? Is the liability analysis different for debt securities compared with securities of other types?
According to the Measures for the Administration of Bond Transactions in the National Inter-bank Bond Market, the Rules for Information Disclosure on Debt Financing Instruments of Non-financial Enterprises in the Inter-bank Bond Market (2012 Revision) and the Rules for the Private Placement of Debt Financing Instruments of Non-financial Enterprises in the Inter-bank Bond Market, the People’s Bank of China and the NAFMII both set out rules for liability penalties related to debt securities offerings. All transaction participants, including the issuer, may be subject to liabilities according to the above rules. The liability regime varies from other security types. Corporate bonds, enterprise bonds and stocks are subject to the supervision of different government authorities and regulations.
What types of remedies are available to the investors in debt securities?
The NAFMII maintains a mechanism of bondholder meetings, and relevant self-regulatory rules are already in place to support the mechanism. Investors in the inter-bank debt securities market are able to protect their interests and lawful rights through such mechanism. Failing this, investors could also solve the disputes through lawsuits or arbitrations.
What sanctioning powers do the regulators have and on what grounds? What are the typical results of regulatory inquiry or investigation?
The NAFMII manages debt-financing instruments of non-financial enterprises, and relevant issue and trade of such instruments in a self-discipline fashion, and submits the record to the People’s Bank of China for filing.
The National Interbank Lending Center is responsible for the routine monitoring of the trade of debt-financing instruments and collect trade analysis, and reports to the NAFMII on a monthly basis.
The CCDC is in charge of the routine monitoring of the issuance, registration, trusteeship, settlement and cash of the debt financing instruments. It gathers information and reports to the NAFMII on a monthly basis.
The NAFMII reports to the People’s Bank of China about registration totals, self-regulatory status, market operation status and execution of the self-regulatory rules.
The NAFMII may take measures such as admonition, persuasion and public censure against persons and authorities that violate the self-regulatory rules.
The People’s Bank of China will exercise supervision and administration towards the NAFMII, National Interbank Lending Center and the CCDC according to law. The NAFMII, National Interbank Lending Center and CCDC will report to the People’s Bank of China in a timely fashion regarding the issue and trade of debt-financing instruments, and relevant information in accordance with requirement.
Individuals and authorities that violate the law and rules are punished by the People’s Bank of China, according to article 46 of the Law of the People’s Bank of China. Where a case constitutes a crime, criminal responsibility will be attached.
What are the main tax issues for issuers and bondholders?
In accordance with tax laws and regulations in China, bond holders of debt financing instruments, as one kind of negotiable securities, will pay the business tax in the trading earnings of the debt financing instruments. Since the bondholders in the inter-bank bond market are financing institutions, they must pay the corporate income tax based on the interest income and trading earnings of debt financing instruments. At present, the debt financing instruments transaction in the inter-bank bond market for the issuers and bondholders has not been imposed on the stamp tax.
Update and trends
Update and trends
The latest policy support of the debt financing instrument for private enterprises in China
On 22 October 2018, the executive meeting of the State Council of China issued a decision to further implement measures to support small and micro enterprises and private enterprises. The central bank subsequently issued a policy notice on implementation, saying that, on the basis of the original policy, the amount of reloans and rediscount will be increased by 150 billion yuan. At the same time, the central bank has guided the establishment of a ‘private enterprise bond financing support instrument’; that is, the central bank uses reloans to provide part of the initial funds, which are market-oriented, by professional institutions that will focus on supporting high-quality private enterprise bond financing addressing temporary difficulties through the sale of credit-risk mitigation tools, guarantees and credit enhancements, among other things.
Small and micro enterprises and private enterprises face higher operational risks than state-owned enterprises, which makes their financing more difficult and expensive.
If a risk-sharing mechanism can be established, the public funds can share the risks involved in the issuance of debts or loan financing by small and micro enterprises, which will reduce the burden on institutions providing financing and improve the cost-effectiveness of financing for small and micro enterprises and private enterprises.
Private enterprises are financed by issuing bonds and loans. For bond financing, the central bank provides financial support to the guarantee agencies, and the guarantee agencies choose private enterprises to issue bonds to them for credit enhancement. For companies using loan financing, they can obtain credit enhancement support through a financing guarantee. Recently, China established a national financing guarantee fund, which was jointly sponsored by the Ministry of Finance and commercial banks. The financing guarantee fund mainly provides financing support for private enterprises by sharing the bank credit risk. In this way, the risk-sharing mechanism for different financing channels of private enterprises is formed preliminarily, and it is expected to effectively instigate the credit fund investment of private enterprises and small and micro enterprises.