June 29, 2018

CBIRC issued the “Administrative Measures for Financial Assets Investment Companies” (for trial implementation). The newly issued measures clarify the attributes of non-bank financial institutions of financial asset investment companies and stipulate the general conditions for the establishment of financial asset investment companies. The measures are to be implemented with effect from June 29, 2018.

The measures contain six chapters, with the first chapter being on the general rules that clarify the legislative basis, scope of application, basic principles, regulatory duties, and other content. The second chapter stipulates the establishment, change, and termination of financial asset investment companies. The third chapter stipulates the business scope of the financial asset investment company and its business operation rules, and encourages the debt-to-equity swap through the form of “debt collection and share conversion.” It also emphasizes that the debt-to-equity swap must strictly follow the principle of clean transfer and real sale and strictly guard against the conflicts of interest and  benefits transfer. Chapters four and five specify risk management and supervision and management requirements, respectively. Chapter six on the Supplementary Provisions stipulates matters such as the right to interpret and the time of entry into force.

Considering that financial asset investment companies are mainly implemented as bank debt-to-equity swaps, the measures require financial asset investment companies to be established by domestic commercial banks as major shareholders, but does not require commercial banks to control and allow other eligible investments. In line with the spirit of expanding opening up to the outside world, the measures impose "national treatment" on foreign-invested institutions investing in financial asset investment companies and there is no restriction on the proportion of foreign ownership. CBIRC formulated these measures to enable such institutions to follow the law, ensure that they standardize the debt-to-equity swap business, improve the efficiency of debt-to-equity swaps, effectively prevent financial risks, and truly reduce the leverage ratio of enterprises. The measures:

  • Guide the financial assets investment companies to make full use of various market-oriented methods and channels to raise funds.
  • Specify the provisions for various types of risks that may arise in the process of debt-to-equity swap.
  • Put forward specific requirements for the corporate governance structure, risk management framework, capital management, credit risk, liquidity risk, and operational risk management of financial asset investment companies.
  • Specifies how financial assets investment companies can regulate the exercise of shareholder rights.

The measures first require financial asset investment companies to establish and improve the equity management system, clarify the purpose and strategy of holding shares, and determine reasonable shareholding. They stipulate that these companies should not be controlled by debt-for-equity swaps. Second, the measures stipulate that financial asset investment companies should send personnel to participate in corporate shareholder (large) meetings, board of directors, and board of supervisors; these companies should also participate in corporate governance and major business decisions. Third, the measures stipulate that financial asset investment companies should standardize the future debt financing behaviors of enterprises with relevant entities in the debt-to-equity swap agreement, jointly formulate reasonable debt arrangements and financing plans, and clearly define the company's asset-liability ratio. In addition, the financial asset investment companies shall take measures to stop the acts that damage shareholder rights and interests. When a shareholding enterprise is adversely affected by factors such as management and environment, this results in, or may cause, a significant increase in the risk of holding shares; in this case, effective measures should be taken in time to protect its legitimate rights and interests.

 

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Effective Date: June 29, 2018

Keywords: Asia Pacific, China, Banking, Securities, Debt-to-Equity Swaps, Corporate Governance, CBIRC

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