On July 23, 2014, the China Banking Regulatory Commission (the “CBRC”) issued the Interim Provisions on the Administration of the Specialized Subsidiaries of Financial Leasing Companies (the “Interim Provisions”).
The Interim Provisions further specifies how financial leasing companies are permitted to establish subsidiaries to conduct financial leasing business in accordance with their business needs, which was first stated in the Administrative Measures for Financial Leasing Companies (the “Administrative Measures”) re-issued in March 2014. Pursuant to the Interim Provisions, financial leasing companies are permitted establish specialized subsidiaries to conduct financial leasing business in specific areas overseas, and in China’s free trade zones and bonded zones, and includes the financial leasing of aircraft, vessel and other leasing business areas recognized by the CBRC.
The Interim Provisions removes the prior limitation whereby financial leasing companies were only allowed to establish subsidiaries in the form of project companies. The Interim Provisions will contribute to the further development of specialized financial leasing businesses by financial leasing companies and isolate legal risk in certain business areas. They will also facilitate the development of offshore financial leasing businesses by financial leasing companies through offshore financial leasing platform companies. This article analyzes and discusses the main provisions of the Interim Provisions and its possible influence.
“Specialized Subsidiaries” and how they are Difference from Project Companies in Bonded Areas
The Interim Provisions first introduced the concept of a financial leasing company’s “specialized subsidiary.” According to Interim Provisions, a “specialized subsidiary” means a specialized leasing subsidiary established overseas and in China’s free trade zones and bonded areas by a financial leasing company, in accordance with relevant laws and regulations, for the purposes of conducting financial leasing business in “specific areas.”The term “specific areas” means the areas where a financial leasing company has conducted financial leasing business and where it has sound operations. This includes the financial leasing of aircraft, vessels, and others leasing businesses recognized by the CBRC.
Specialized subsidiaries are different from project companies in bonded areas (the “Project Company in Bonded Areas”). A Project Company in Bonded Areas is established by a financial leasing company pursuant to the Notice on Relevant Issues Concerning Financial Leasing Companies’ Establishment of Project Companies in Domestic Bonded Areas to Conduct Financial Leasing Business issued by CBRC in 2010. The differences between a specialized subsidiary established pursuant to the Interim Provisions and a Project Company in Bonded Areas are as
- Different functions: A specialized company separates certain mature financial leasing businesses from other lesser mature businesses to leverage the advantages in such mature financial leasing businesses. By contrast, Project Companies in Bonded Areas do not have such a function. Rather, its main function is to isolate relevant project risk for a specific leasing project conducted by the financial leasing company.
- Different standards for establishment: CBRC approval for the financial leasing company is required for the establishment of each specialized subsidiary. The financial leasing company applicant has to meet relevant conditions, and complete relevant application and business launch formalities. By contract, so long as the financial leasing company obtains the financial leasing business qualification for a Project Company in Bonded Areas from the CBRC, it can then establish a Project Company in Bonded Areas in the same way as it would when establishing a normal company for a relevant lease project (the Project Company in Bonded Areas is required to correspond to a specific lease project).
- Different organizational attributes: the specialized subsidiaries shall obtain financial license and thus are financial institutions; however Project Companies in Bonded Areas are ordinary enterprises.
Domestic Specialized Subsidiaries and Offshore Specialized Subsidiaries
In addition to permitting financial leasing companies to establish domestic specialized subsidiaries in China’s free trade zones and bonded areas, the Interim Provisions expressly permit financial leasing companies to establish specialized subsidiaries overseas.
Prior to the introduction of the Interim Provisions, relevant regulations did not expressly permit financial leasing companies to directly establish subsidiaries overseas. As a result, there were some legal obstacles financial leasing companies faced when establishing project companies or business platform companies overseas. Namely, financial leasing companies had to act as a lessor through project companies or platforms controlled by affiliates overseas, thereby complicating the transaction structures and creating uncertainty.
Following the introduction of the Interim Provisions, financial leasing companies can directly establish platform companies for their offshore leasing businesses overseas (in traditional jurisdictions such as Ireland),provided that the establishment of such companies is approved by the CBRC. Financial leasing companies would then conduct the relevant offshore financial leasing businesses through the newly established project companies. This reform will enable financial leasing companies to further define the equity relationships of their offshore lease projects, simplify transaction structures for relevant lease projects, and facilitate the lease and financing support financial leasing companies provide to their platform companies or project companies overseas.
Requirements for Financial Leasing Companies when Applying to Establish a Specialized Subsidiary
Per the Interim Provisions, the requirements to establish a domestic specialized subsidiary are different than the requirements to establish an offshore specialized subsidiary. In general, the requirements to establish an offshore specialized subsidiary are more favorable to the financial leasing company than the requirements to establish a domestic specialized subsidiary. A summary of the requirements is below:
Domestic Specialized Subsidiary
Offshore Specialized Subsidiary
Requirements for Specialized Subsidiaries once they are Established
- Domestic specialized subsidiaries
Once it is established, a domestic specialized subsidiary established by a financial leasing company shall meet the following requirements:
- The name of a specialized subsidiary shall reflect the name of the financial leasing company parent; the specific area in which it carries out financial leasing business shall be specified.
- Minimum registered capital requirement of RMB 50 million or the equivalent in a freely convertible currency.
- The financial leasing company parent shall hold 100% of its equity.
- Has qualified directors, senior executives, and employees that are familiar with the financial leasing business (directors and senior executives shall be subject to a qualification review system).
- Articles of association comply with the PRC Company Law and the CBRC’s rules; it has sponsors that comply with the relevant requirements; it has sound corporate governance, internal controls, and risk management systems, as well as an information management system that is suitable for its business operations.
- Has a place of business, security measures, and other facilities that are suitable for its business operations; and
- Satisfies other prudent conditions as stipulated by the CBRC.
Notably, the Interim Provisions permits a financial leasing company to attract other investors when establishing domestic specialized subsidiaries. These investors shall satisfy the conditions required under the Administrative Measures relating to sponsors of a financial leasing company. The sponsors shall also demonstrate the ability to enhance the business expansion ability and risk management level of the domestic specialized subsidiary in the relevant financial leasing areas. The ability for a financial leasing company to attract other investors when establishing a domestic specialized subsidiary may enrich its capital structure in specific areas.
- Offshore specialized subsidiaries
Although there are various requirements for domestic specialized subsidiaries once they are formed, there are no specific requirements for offshore specialized subsidiaries in the Interim Provisions in this respect. The Interim Provisions only require financial leasing companies to obtain the CBRC’s approval prior to initiating the formation of an offshore specialized subsidiary in accordance with the laws and regulations of the jurisdiction where such offshore specialized subsidiary is intended to be registered. Within fifteen (15) days of the incorporation of the offshore specialized subsidiary, the financial leasing company is required to submit a report to
the CBRC. The directors and senior executives of the offshore specialized subsidiary also have to be approved in advance by the CBRC.
Operating Rules of Specialized Subsidiaries
According to the Interim Provisions, specialized subsidiaries established by financial leasing companies shall comply with the following operating rules:
- The financial leasing company may, in accordance with its business scope, authorize the business scope of its specialized subsidiary in accordance with the principle of prudent operations (excluding inter-bank borrowing and fixed-income securities investment businesses), and report it to the CBRC for filing.
- When a specialized subsidiary establishes a project company overseas to conduct financial leasing business, it shall comply with relevant reporting obligation provisions for financial leasing companies in the Notice on Relevant Issues Concerning Financial Leasing Companies’ Establishment of Project Companies in Domestic Bonded Areas to Conduct Financial Leasing Business issued by the CBRC in 2010.
- The specialized subsidiary shall, after it issued bonds overseas or after its offshore project company begins to conduct financial leasing business, report, on a quarterly basis, to the bank regulatory bureau in its jurisdiction, and the bank regulatory bureau in the place where the financial leasing company is located.
- The specific requirements and procedures for various types of business and associated transactions conducted by specialized subsidiaries shall be governed by the associated relevant provisions that are applicable to the business conducted by financial leasing companies.
- The specialized subsidiary shall establish a sound corporate governance structure, and scientifically segregate its departments and their duties.
- In principle, people in charge of a specialized subsidiary shall be senior executives of the financial leasing company.
Supervision of Specialized Subsidiaries by the CBRC
The CBRC has the following supervisory authority over specialized subsidiaries:
- Implement consolidated supervision of the specialized subsidiary; to permit the CBRC to implement consolidated supervision, financial leasing companies shall uniformly implement the relevant regulatory requirements imposed by the CBRC.
- The ratio of net capital and risk-weighted assets of a domestic specialized subsidiary shall not be lower than the minimum regulatory requirements imposed by the CBRC.
- The domestic specialized subsidiary shall submit its financial statements and other statements
required by the CBRC to the bank regulatory bureau in its locality.
- The specialized subsidiary shall, by reference to applicable CBRC rules, establish a capital management system, asset quality classification system, reserve system, and internal auditing system.
- If any significant matter occurs relating to an offshore specialized subsidiary, the financial leasing company parent shall report such matter to the CBRC within fifteen (15) working days.
- The financial leasing company shall submit special reports containing relevant information about its specialized subsidiaries, on a quarterly basis, to the CBRC.