China: Capital contributions using equity interests -- soon to be available for foreign-invested enterprises in China

Last Updated: 19 May 2011
Article by Grace Lee and Chuen-Pei Ng

On 4 May 2011, the Ministry of Commerce ("MOFCOM") issued a public consultation draft of the Administrative Measures concerning Capital Contributions Made with Equities by Enterprises with Foreign Investment ("Draft Measures"). The proposed deadline for submissions is 20 May 2011.

If the Draft Measures come into effect in its current state, they will formally allow investors to use equity interests as an additional non-monetary means for making capital contributions to a foreign-invested enterprise. Under the current PRC laws and regulations, only tangible assets, intellectual property and land-use rights are allowed to be used as non-monetary capital contributions.

The Draft Measures are similar to the State Administration of Industry and Commerce's Administrative Measures for the Registration of Capital Contributions Made with Equities, promulgated in 14 January 2009, which made "capital contribution made with equity interests" ("Equity Contribution") available for investment in Chinese domestic enterprises.

What is Equity Contribution?

Equity Contribution is the act of using equity interests in a limited liability company or joint stock limited company incorporated in China to make a capital contribution for "establishment" of foreign-invested enterprises ("FIE"). The term "establishment", in this sense, includes the following three scenarios:

  • forming a FIE by way of establishing a new legal corporate entity;
  • injecting capital to change a domestic enterprise into a FIE; and
  • injecting capital to change the equity structure of a FIE.

What types of equity interests are allowed for Equity Contribution?

The Draft Measures stipulates that equity interests to be contributed must have clear title and full equity rights. Hence equity interests must not subject to any encumbrances, such as a pledge. In addition, Equity Contributions are not permitted to supplement a company's partially paid registered capital, and should not be equity interested held by a foreign-invested investment company or a venture capital.

Further requirements for Equity Interests

The equity interests to be contributed must be appraised by a domestic evaluation agency established in accordance with the PRC law. The aggregate value of the equity interests and other non-monetary capital contributions made by all equity interest holders must not exceed 70% of the registered capital of the company receiving the Equity Contribution.

The Investor Companies, Equity Companies and Investee companies must still comply with the Provisions on Guiding the Orientation of Foreign Investment promulgated by the State Council on 11 February 2002, the Catalogue of Industries for Guiding Foreign Investment by MOFCOM on 31 October 2007 and other related relevant foreign investment laws and regulations.

Conclusions

Currently, MOFCOM (usually at the provincial level) only approves the use of Equity Contribution on a case-by-case basis. Once the Draft Measures come into force, it is expected that the approval process for Equity Contributions will become more standardised and streamlined. Foreign investors will also find greater flexibility in restructuring their assets in China if Equity Contribution is made available as an additional means for capital injection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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