In November 2011, the State Administration for Industry and
Commerce ("SAIC") of the People's Republic of China
(the "PRC") released the Administrative Measures for the
Registration of Debt-for-Equity Swaps (the "Swap
These Swap Measures took effect from 1 January 2012.
The Swap Measures set out the policy framework for the
conversion of debt owed by a limited liability company established
in the PRC, into equity in that company ("debt-forequity
The Swap Measures
The Swap Measures make clear that debt-forequity swaps are
permitted in the PRC as a form of non-cash capital contribution to
a company registered in the PRC.
The Swap Measures contemplate that the following categories of
debt may be swapped into equity:
debt arising from a contract between the creditor and the
company where the creditor does not contravene prohibitory
provisions of PRC laws and regulations;
debt that have been approved by courts; and
debt listed in the reorganisation plans or in reconciliation
(settlement) agreements approved by the relevant courts.
Process for Implementing the Debt-For- Equity Swap
The procedures for effecting a swap are as yet unclear and will
be subject to further regulations issued by the PRC government or
clarifications through Court rulings. It is however clear that to
effect a swap, the following will be required:
The debt to be swapped into equity has to be
Prior to undertaking the swap, an approved assets valuation
institution, generally referring to licensed audit or valuation
firms in the PRC, will have to be appointed to value the debt. The
terms of the swap must be such that the debt is converted at or
below its appraised value.
Non-Cash Capital Contribution
The sum of the appraised capital contribution of invested
debt-for-equity swap and the appraised capital contribution of
other non-monetary properties is not to exceed seventy percent
(70%) of the registered capital of the company.
Capital contribution through debt-forequity swaps must be
verified by a qualified capital verification institution that will
issue a certificate (the "Valuation Certificate")
specifying the following:
basic information of the debt, including the time when such
debt occurred, the name of title of the concerned parties, the
subject matter of the contract and the fulfillment of obligations
attached to the debt;
valuation of the debt, including the name of the valuation
institution, the document number of the Valuation Certificate, the
benchmark date of the valuation, and the verified value;
the progress of the debt-for-equity swap, including the
conclusion of a debt-for-equity agreement, the creditor's
exemption of the Company's debt;
The accounting documents demonstrating relation to the debt
the approval circumstances of the debt-for-equity swap if the
approval thereof is required by law.
Allocation of Creditors' rights
In the event of competing claims by more than one creditor, the
Swap Measures sets out a process of allocation of the converted
equity between the creditors.
Debt in a Foreign Invested Company
A swap of debt into equity in a wholly foreign owned company or
a sino foreign joint venture is subject to additional approvals by
the authorities with regulatory authority over foreign
The issue of the Swap Measures make clear the viability of PRC
established companies issuing convertible instruments as a means of
fund raising, and provides an additional means of investment in PRC
companies. The actual procedures for effecting the swaps will have
to wait further rulings in Court and implementing regulations or
This update is provided to you for general information and
should not be relied upon as legal advice.
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