After several months’ consultation, State Administration of Foreign Exchange (SAFE) released a Foreign Exchange Rules On Administration Of Cross-border Security (the “Cross-border Security Rules”) on 19 May, which will become effective on 1 June 2014. The Cross-border Security Rules will dramatically relax regulations on Cross-border Security by removing all up-front approvals to the effect that FX/RMB will be fully convertible in respect of Cross-border Security.
Cross-border Security includes (a) provision of security by a Chinese entity where both creditor and obligor are foreign entities (“Outbound Security”); (b) provision of security by a foreign entity where both creditor and obligor are Chinese entities (“Offshore Security”); and (c) other forms of cross-border security (“Other Security”). The Cross-border Security Rules sets up the following regulations on the each form of cross-border security:
Outbound Security will no longer be subject to any prior approval. SAFE will only conduct procedural verifications.
Non-financial entity will be free to provide any Outbound Security and will no longer be subject to any requirement on its relationship with the offshore obligor or its financial status. Foreign invested enterprise will be able to provide security for the debt of its foreign shareholder or affiliates.
There will be no quota and other restrictions on provisions of Outbound Security, provided that if any previous Outbound Security has been enforced, before the offshore obligor has indemnified the Chinese security provider, the Chinese entity will not be allowed to provide any new Outbound Security unless approved by SAFE.
Unless approved by SAFE, offshore funding secured by an Outbound Security shall not be remitted into China for use in any form such as loans, equities, securities investments, etc.
No SAFE approval will be required for enforcement of the Outbound Security. A bank acting as a security provider can directly make outbound payment when the security is enforced, and a non-bank entity acting as a security provider can instruct its bank to make outbound payment for enforcement of the security.
Once an Outbound Security is enforced, the Chinese security provider shall register with SAFE the foreign credit arising from such enforcement.
Individuals will be allowed to provide Outbound Security, subject to the same procedures applicable for non-financial institutions.
The secured party must be a financial institution in China, the obligor (the borrower) must be a non-financial institution and the secured obligations shall be loans or credit facilities in either RMB or foreign currencies.
Registration will be carried out by the Chinese financial institutions acting as the secured party.
If an Offshore Security is enforced, the Chinese borrower will not be allowed to enter into new loan agreements or make new drawdown of loans secured by the Offshore Security before it has indemnified the offshore security provider.
The enforcement amount of an Offshore Security shall not exceed an amount that is equal to the Chinese borrower’s unaudited net assets of the previous year.
Once an Offshore Security is enforced, the Chinese borrower shall register with SAFE the foreign debt arising from such enforcement.
Chinese entities can enter into Other Security without any restrictions provided that it is in compliance with applicable laws, rules and the Cross-border Rules. Unless otherwise provided by SAFE, no registration or filing is required for any Other Security.
A Chinese entity may make payment of security provisions fees to offshore security provider, subject to the same rules as payment under trade of services.
The Cross-border Security Rules will encourage cross-border finance transactions by facilitating companies to obtain finance with onshore and offshore resources.