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How does a foreign investor set up a financial institution in the PRC?

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How does a foreign investor set up a financial institution in the PRC?

7. Enterprise Group Finance Companies

A. Definitions

An “Enterprise Group Finance Company” refers to a non-bank financial institution which provides financial management services for its group member companies (“Member Entities”) in order to centralise the management of group funds and improve the efficiency of use of funds.

A finance company established by a foreign-funded investment company (“Foreign-Funded Investment Company”) to provide financial management services to its investment enterprises (“Investment Enterprises”) within the PRC is governed by the laws regulating Finance Companies of Enterprise Groups.

An “Enterprise group” refers to a group of enterprises which are lawfully registered in China and consists of holding companies, subsidiaries, companies investing in the holding company and subsidiaries, and other member enterprises or businesses that are linked by source of capital with the holding company and subsidiaries and share the same articles of association.

“Member Entities” include: any holding company; any subsidiaries in which a holding company holds at least 51% of the shares (“subsidiary companies”); any company in which 20% or more of the shares are held, either alone or together, by a holding company, its subsidiary companies or any other company in which a holding company and its subsidiary companies together hold less than 20% of the shares but are the largest shareholder nonetheless; and public institution juridical persons or social organisation juridical persons which are subordinate to the holding company or the subsidiary companies.

A “Foreign-Funded Investment Company” refers to a company established in the PRC to undertake investment activities directly which is funded entirely by a foreign investor or investors. Investment Companies include foreign-funded investment companies, as well as any enterprise registered in the PRC, in which more than 25% of the shares are held by a Foreign-Funded Investment Company, either alone or together with its investors, and at least 10% are held by the Foreign-Funded Investment Company.

B. Applicable laws

The Measures for the Administration of Enterprise Group Finance Companies (企业集团财务公司管理办法) issued by the CBRC (No. 5 of the Order of CBRC) and which became effective from September 2004 (“Enterprise Group Finance Companies Measures”), are currently the main laws regulating Enterprise Group Finance Companies.

Foreign-Funded Investment Companies are governed by the provisions of the Enterprise Group Finance Companies Measures relating to holding companies, while Investment Enterprises are governed by the provisions relating to Member Entities.

C. Primary regulator

The CBRC is the principal approving authority for foreign investment in an Enterprise Group Finance Company in China. The CBRC’s website can be viewed at http://www.cbrc.gov.cn/index.html.

The name of the finance company requires approval from the industrial and commercial registration organ. The words “Finance Company” cannot be used in the name of an entity without prior approval from the CBRC.

D. General requirements for an enterprise group finance company

General conditions for an enterprise group seeking to establish a finance company

The following conditions must be met by an enterprise group applying to establish a finance company:

  1. it must be in compliance with the industrial policies of the state;
  2. its holding company must have had registered capital of at least RMB 800 million in the year immediately preceding the application;
  3. the group must have had total assets of at least RMB 5 billion as shown in its consolidated financial statements as at the end of the financial year immediately preceding the application, and the ratio of return on equity for such financial year must have been at least 30%;
  4. the group’s member entities must have had business income of at least RMB 4 billion and pre-tax profits of at least RMB 200 million in each of the 2 years immediately preceding the application;
  5. it must have stable cash flow and large cash reserves;
  6. the holding company must have been incorporated for at least 2 years, and must have experience of conducting financial management and fund management in respect of an enterprise group;
  7. the holding company must have sound corporate governance procedures, and must not have violated any applicable laws or rules, or committed any act casting doubt on its honesty or credibility, in the preceding 3 years;
  8. the holding company must have a core, principal business; and
  9. the holding company must not have entered into any inappropriate related party transactions.

A foreign-funded investment company must additionally have net assets of at least RMB 2 billion in the year preceding its application, and pre-tax profits of at least RMB 200 million in each of the 2 financial years preceding its application.

Additional conditions

The following conditions also apply:

  1. the enterprise group’s funds must be in need of centralised management and must be reasonably expected to optimise the group’s use of funds;
  2. the articles of association must conform to the Companies Law;
  3. the finance company must have registered capital of at least RMB 100 million, or its equivalent in a convertible foreign currency, which must be fully paid up. A finance company which conducts foreign exchange business is required to have registered capital of at least US$ 5 million or its equivalent in a convertible foreign currency. The CBRC may alter the required minimum registered capital for finance companies if it considers it necessary for prudent supervision;
  4. the finance company’s directors and senior management must possess the qualifications required by the CBRC and it must employ suitably qualified professionals to hold key positions in areas such as risk management, and intensive fund management etc.;
  5. it must have well-developed corporate governance procedures, internal controls, business operating procedures, and risk prevention measures, etc.;
  6. it must have business premises, safety measures and other facilities which satisfy relevant requirements;
  7. at least two thirds of the finance company’s employees must have at least 3 years’ experience of banking or financial work; and at least one third must have at least 5 years’ experience of banking or financial work; and
  8. other conditions as may be prescribed by the CBRC.

Conditions relating to the name of a Finance Company

A finance company’s name must include the words “Finance Limited Company” or “Finance Limited Liability Company”, and the name of the enterprise group, either in full or in short. The words “Finance Company” cannot be used by an entity without obtaining prior approval from the CBRC.

E. Establishment requirements

There are two stages to the establishment of a finance company; the preparatory stage and commencement of business stage.

Preparatory stage

The holding company must file an application for the establishment of a finance company with the CBRC together with the following documents:

  1. an application letter which includes the name, location, registered capital, shareholders, share structure, business scope, etc. of the proposed finance company;
  2. a feasibility study report which includes:
    1. the overall production and management situation of the holding company and other member entities, their cash flow analysis, position in the relevant industry and their mid and long-term development plan;
    2. the purpose and functions of establishing the finance company and a business forecast; and
    3. consolidated balance sheets, statements of profits and losses and statements of cash flow for the most recent 2 financial years, audited by an eligible accounting firm;
  3. a list of the member entities, and the relevant certificates issued by relevant authorities;
  4. the “Enterprise Group Registration Certificate”, photocopies of the Business Licences of the applicant and other investors, and their guarantee for capital contribution;
  5. the Certificate of Approval of the Foreign-Funded Enterprise of the foreign-funded investment company and its investment enterprises;
  6. testimonials signed by the legal representative of the holding company to confirm the authenticity of the abovementioned documents; and
  7. other documents as may be required by the CBRC.

Commencement of business stage

An application for commencement of business should be filed with the CBRC with the following documents:

  1. a draft of the articles of association of the proposed finance company;
  2. operational guidelines and plans of the finance company;
  3. a list of the names of the finance company’s shareholders with the amounts and proportions of their respective capital contributions;
  4. a capital verification certificate issued by a legal capital verification institution as to the capital contributions of the finance company’s shareholders;
  5. a list of the proposed directors and officers, together with detailed curricula vitae and testimonials as to their competence for such posts;
  6. a list of persons proposed to be employed in risk management and centralised fund management, together with their detailed curricula vitae;
  7. testimonials of the relevant staff establishing that they have been engaged in banking or financial work for at least 5 years;
  8. the finance company’s business rules and risk prevention systems;
  9. documents relating to the finance company’s business premises and other related operational facilities; and
  10. other documents as may be required by the CBRC.

F. Operational requirements

A finance company must satisfy the following requirements in running its business:

Liability/Asset Ratio

  1. its capital adequacy ratio must not be lower than 10%;
  2. the amount of capital borrowed must not exceed its total capital;
  3. the amount guaranteed must not exceed its total capital;
  4. the ratio of its short-term securities investment to its total capital must not be higher than 40%;
  5. the ratio of its long-term investments to its total capital must not be higher than 30%; and
  6. the ratio of its own fixed assets to its total capital must not be higher than 20%.

Other requirements

  1. a finance company must establish a risk management department and an audit department which are responsible for formulating risk control and auditing systems which must be reported to the board of directors annually, and reported to the CBRC;
  2. an annual audit must be carried out by a qualified audit firm and an annual audit report, signed by the chairman of the board, must be submitted to the CBRC before 15 April of each year;
  3. the balance sheet, statement of profits and losses, statement of cash flow, statement of appraisal of its non-on-site supervision indicators, and other statements as required by the CBRC must be submitted to the CBRC. The financial statements and documents for each financial year must also be submitted to the CBRC within 1 month after the end of the financial year;
  4. the legal representative of a finance company is responsible for the authenticity of all financial statements bearing his signature;
  5. by the end of April in each year, a finance company must submit to the CBRC a directory of the member entities in the enterprise group to which it belongs, and must provide information and data regarding the enterprise group’s operating situation in the previous year;
  6. before commencing business with a new member entity, a finance company must file information in relation to the new member entity with the CBRC. A finance company must also notify the CBRC if any member entity ceases to be part of the enterprise group;
  7. a finance company must pay a deposit reserve and draw a loss reserve as required by the People’s Bank of China, and write off its losses in accordance with the relevant provisions; and
  8. a finance company must comply with the relevant provisions of the People’s Bank of China on interest rate management, and those conducting foreign exchange business must comply with the relevant requirements of the SAFE.

G. Capital requirements

Amount of capital required

The minimum registered capital required for the establishment of a finance company is RMB 100 million, or its equivalent amount of convertible currency. The registered capital of a finance company conducting foreign exchange business must be at least USD 5 million or an equivalent amount of convertible currency.

When applying for the establishment of a finance company, the board of directors of the holding company must also make a written commitment to increase capital if the finance company faces difficulty in meeting its payment obligations, and to state such increased capital in the finance company’s articles of association.

Additional requirements

A finance company’s registered capital should be raised mainly from its member entities, although qualified institutional investors are also allowed to invest. A qualified institutional investor refers to an external strategic investor which will hold shares in the finance company for at least 5 years and has considerable management experience in the industry.

The registered capital for establishing a finance company by a foreign-funded investment company may be contributed by the foreign-funded investment company either alone or jointly with its investors.

H. Time frame for establishment

If the CBRC approves an application for preparation prior to the establishment of a finance company, the applicant must complete the preparatory work and file an application to the CBRC for commencement of business within 3 months of receipt of the approval.

If the CBRC grants approval for commencement of business, it will issue a “Financial Business Permit”. The finance company may not commence business until it has registered with the AIC on the strength of the “Financial Business Permit”, and has obtained a “Business Licence of Enterprise”.

I. Scope of Business

General scope of business

Business which can be conducted by an Enterprise Group Finance Company are:

  1. providing its member entities with financial and financial advice services, credit authentication, and related consulting and agency services;
  2. assisting member entities in collecting and paying transaction proceeds;
  3. providing approved insurance agency services;
  4. providing guarantees to its member entities;
  5. handling entrusted loans and entrusted investments between member entities;
  6. handling acceptance and discount of bills for member entities;
  7. handling internal transfer settlement between member entities, and designing programmes for settlement and clearance accordingly;
  8. taking deposits from member entities;
  9. granting loans to and handling financing leases for member entities;
  10. engaging in inter-bank borrowing; and
  11. other businesses as may be approved by the CBRC.

If a finance company meets the above conditions and: (1) has been established for at least one year and is well managed; (2) has registered capital of at least RMB 300 million (or RMB 500 million, if it engages in consumer credit, buyer’s credit and financing leases for its member entities); (3) it has received approval from its shareholders in general meeting and its directors; (4) it has a sound investment decision making mechanism, risk control system, working rules and a corresponding management information system; and (5) it has appropriately qualified professionals, it can also engage in the following businesses:

  1. issuing finance company bonds upon approval;
  2. underwriting enterprise bonds of the member entities;
  3. contributing share right investments to financial institutions;
  4. investing in securities; and
  5. undertaking consumer credit, buyer’s credit and financing leasing for its member entities.

A finance company must not engage in:

  1. any offshore business; or
  2. any form of cross-border fund business except for the purpose of assisting its member entities in the collection and payment of transaction proceeds.
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Posted on

2014-11-06