30 May 2014
The State Administration of Foreign Exchange of the PRC (SAFE) has recently issued the Provisions on Foreign Exchange Administration of Cross-Border Security and the relating implementation guidelines (collectively the "New Regulations"). The New Regulations are to come into effect on 1 June 2014 and will supersede a series of regulations previously issued by SAFE on cross-border security and introduce sweeping changes.
The existing cross-border security regime which has been in force for around two decades will be completely overhauled by the New Regulations, and the key changes include the following:
- Abolishing prior SAFE approval and quota requirements for cross-border security;
- Requiring SAFE registration for two specific types of cross-border security only;
- Removing eligibility requirements for participants in cross-border security;
- Validity of cross-border security under PRC law ceasing to be conditional upon obtaining approval from, or registration with, SAFE;
- Removing SAFE verification requirement for performance of cross-border security.
Types of Cross-border Security
The New Regulations classify cross-border security into three types as follows:
- Neibaowaidai (内保外贷) (NBWD): security/guarantee provided by an onshore security provider for a debt owing by an offshore debtor to an offshore creditor.
- Waibaoneidai (外保内贷) (WBND): security/guarantee provided by an offshore security provider for a debt owing by an onshore debtor to an onshore creditor.
- Other Types of Cross-border Security (其他形式跨境担保): any cross-border security/guarantee other than NBWD and WBND.
- NBWD (including any subsequent change to its major terms) shall be registered with SAFE within 15 working days of execution of the security document (or 15 working days of the date of the change). In the case where the onshore security provider is a bank, the bank shall report the data of NBWD to SAFE directly. The existing SAFE approval and quota requirements will be removed by the New Regulations.
- Proceeds of offshore borrowings in a NBWD transaction shall be used by the offshore debtor within its ordinary business scope, and shall not be used for any speculation purpose or be repatriated directly or indirectly to the PRC without SAFE's approval. The existing restrictions imposed by SAFE on the usage of proceeds of offshore borrowings will continue to apply.
- There will no longer be any shareholding or financial status requirement on the onshore security provider and the offshore debtor for a NBWD transaction. In other words, any onshore entity is free to provide cross-border security for any offshore entity.
- A PRC individual is allowed to provide cross-border security for offshore borrowing.
- SAFE approval is no longer required for the onshore security provider to perform cross-border security obligations in a NBWD transaction. That is, the onshore security provider can pay to the offshore creditor direct (by effecting remittance through an onshore bank) where the NBWD has been registered with SAFE. However, any external claim (对外债权) arising from such payment shall be registered by the onshore security provider with SAFE.
- WBND is permitted under the New Regulations only in the situation where an onshore entity (other than a financial institution) borrows loans (excluding entrustment loans) or obtains committed credits from an onshore financial institution. Previously, except in certain pilot projects for PRC domestic companies which were run by SAFE on a trial basis, only foreign investment enterprises had access to funding using WBND.
- The onshore creditor has the duty to report the data of WBND to SAFE but no SAFE registration is required to be conducted by the onshore debtor. Basically SAFE follows the existing practice.
- The debt incurred by the onshore debtor to the offshore security provider which comes into being as a result of realisation or enforcement of cross-border security in a WBND transaction shall be registered with SAFE as short term foreign debt. The outstanding principal amount of such foreign debt cannot exceed the audited net asset value of the onshore debtor for the past year. Any excess over the aforesaid financial limit will be counted as the onshore debtor's foreign debt quota. Previously, the foreign debt so arising would immediately occupy the onshore debtor's borrowing gap.
- The onshore creditor may receive payment from the offshore security provider directly without the need to go through any SAFE procedure.
Other Types of Cross-border Security
- For cross-border security which does not constitute NBWD or WBND, there is no longer any SAFE approval, registration or filing requirement, and so cross-border security provided by an onshore entity for its own debt obligations is not required to be registered with SAFE.
No SAFE Formalities for Security Perfection
- Cross-border security will not be rendered invalid by reason of violation of SAFE regulatory requirements or failure to comply with SAFE approval, registration or filing requirements. Previously, SAFE approval, registration and/or filing were mandatory for validity of cross-border security.
The New Regulations will relax control over cross-border security and fundamentally change the landscape of financing transactions with PRC elements. The changes will definitely be welcomed by financers, particularly those who provide offshore financing under the NBWD regime and those who lend across the border.