This article sets out some questions frequently asked by our clients in respect of lending and cross-border security in the People’s Republic of China (the “PRC”, and solely for the purposes of this article, we do not refer to Hong Kong Special Administrative Region, Macau Special Administrative Region as well as Taiwan when mentioning the PRC).
1. Is a license or regulatory approval required for foreign lenders to lend into the PRC or take security over assets located in the PRC?
No license or regulatory approval is required for foreign lenders to lend money to the PRC entities or take the benefit of security over assets located in the PRC.
2. What are the regulatory requirements on foreign loans / foreign debts?
(1) Foreign debt limits
The foreign debt quota system established under the PRC laws requires that the risk-weighted balance of all foreign loans borrowed by a PRC borrower (other than a bank) shall not exceed its foreign debt quota, which shall be calculated as per the following formula:
net assets of the PRC borrower × the leverage rate of cross-border financing (currently set at 2) × the macro-prudential adjustment parameters (currently set at 1.25)
If the PRC borrower is a foreign invested company (“FIE”), it may opt into the foreign debt quota system or adopt the old regime under which it is entitled to borrow foreign loans up to an amount equal to the difference between its total investment amount and its registered capital. The basis for calculation of the foreign debt limit, once determined by the FIE, shall remain consistent and shall be filed with the local administration for foreign exchange (“SAFE”). The legal requirements on the correlation between the total investment amount and the registered capital of an FIE is listed in the below table:
|Total Investment Amount
||Registered Capital Requirement (as a percentage of the total investment)
|Under US$3 million
|US$3 million - 10 million
||50% (minimum US$2.1 million if the total investment amount is lower than US$4.2 million)
|US$10 million - 30 million
||40% (minimum US$5 million if the total investment amount is lower than US$12.5 million)
|Above US$30 million
||1/3 (minimum US$12 million if the total investment amount is lower than US$36 million)
(2) Foreign debt registration
The PRC borrower shall file for registration with SAFE at least three working days prior to the first drawdown of the foreign loan. Without the foreign debt registration, no loan can be drawn or repaid by the borrower from the PRC. If any of the term, amount, creditor(s) or other material terms under the loan agreement is amended, the PRC borrower shall update the registration accordingly. When the foreign loans are repaid in full, the PRC borrower shall cancel the foreign debt registration with SAFE.
(3) NDRC filing
If the term of foreign loans is one year or more, the PRC borrower shall also file the foreign loan with the National Development and Reform Commission (“NDRC”). It is worth noting that the NDRC filing is also required where the borrower is an offshore entity controlled by a PRC entity.
3. What are the formalities for creation and perfection of pledge over shares in a PRC company?
(1) Creation and registration of share pledge
To create a share pledge, (i) a share pledge agreement shall be executed by the pledgor and the pledgee (and usually the PRC company in which the shares are pledged because it needs to assist with the registration of the share pledge), and (ii) the share pledge agreement shall be filed and registered with (A) the local company registration authority jointly by the pledgor and the pledgee or by an agent (a representative) jointly appointed by the pledgor and the pledgee, if the PRC company in which the shares are pledged is a limited liability company, or (B) the securities depository and clearing institution (with exceptions), if such PRC company is a company limited by shares.
Lenders in a syndicate can appoint a security agent to hold the share pledge on the syndicate’s behalf and enforce the syndicate’s rights under the facility documents, and in this case the security agent should be registered as the pledgee. The share pledge agreement can be executed by way of exchange of signature pages by the parties. No physical delivery of the application documents by the pledgee and/or the pledgor is required if an agent is jointly appointed by them to submit the application for the registration of the Share Pledge.
(2) Cross-border security registration
Two types of cross-border security shall be registered with SAFE, one is domestic security for foreign loans (“NBWD”, 内保外贷) and the other is foreign security for domestic loans (“WBND”, 外保内贷). NBWD means the security provided by a domestic entity located in the PRC in favor of a foreign entity located outside the PRC to secure repayment by a borrower located outside the PRC, and WBND refers to the security provided by a foreign entity located outside the PRC in favor of a PRC entity to secure repayment by a borrower located in the PRC. If the share pledge is created by a foreign shareholder of an FIE in favor of a foreign pledgee to secure repayment by a foreign borrower, no cross-border security registration is required for such share pledge. However, if the share pledge is created by a PRC shareholder of a PRC company in favor of a foreign pledgee to secure repayment by a foreign borrower, cross-border security registration shall be completed.
(3) Enforcement of share pledge
In the event of a default by the borrower and the pledgor under the facility documents, the pledgor cannot unilaterally have the pledged shares sold or transferred to itself or a third party and shall submit the case to the court for enforcement of the share pledge. If the pledged shares would be transferred to a foreign entity, the requirements for foreign investment under the PRC laws shall be complied with.
4. Are there any security registration requirements for provision of a guarantee?
If a guarantee constitutes NBWD or WBND, the guarantee shall be registered with SAFE. SAFE would take a prudent approach to examine the application for cross-border security registration and assess the rationality and authenticity of creation of the guarantee as well as the possibility of performance of such guarantee and payment by the PRC entity from the PRC (in particular in the case of NBWD) to determine if such guarantee could be registered. Without completion of such cross-border security registration, no cross-border flow of money could be made to or from the PRC.
5. Is creation of pledge of receivables in favor of a foreign pledgee legally possible and what formalities shall be followed?
Creation of the pledge of receivables in favor of a foreign pledgee is legally possible. In order for the pledge of receivables to become effective, (i) an agreement for the pledge of receivables shall be executed by the pledgee and the pledgor, and (ii) the pledge of receivables shall be registered with the Credit Reference Centre of the People's Bank of China.
In practice, it is important for the pledgee to (a) perform due diligence on the underlying receivables over which the pledge would be created to ensure the ownership, authenticity, amount and payment term of such receivables; (b) enter into a tripartite letter of confirmation on the receivables with the vendor (the pledgor) and the buyer (debtor of the receivables) to ensure that the buyer acknowledges the pledge of receivables and agrees to pay to the designated escrow account opened by the pledgor with a bank in the PRC; and (c) enter into an escrow agreement with the pledgor and a bank in the PRC (as the escrow agent), pursuant to which the pledgor shall open an escrow account to receive the receivables from the buyers and no outward transfer shall be made without instruction or approval of the pledgee. The escrow account should be opened with a bank in the PRC due to foreign exchange regulation.