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New rules will give greater flexibility for investors in China, says expert

Foreign investors in China will find it easier to restructure companies there after the announcement of a change in the law in China related to the use of company equity as investment capital, an expert has said. 26 Oct 2012

The Chinese Ministry of Commerce (MOFCOM) this week published new rules that will allow the more consistent use of equity in Chinese companies as capital for the creation of companies with foreign investors. These companies are called Foreign-invested Enterprises (FIEs).

Previously the use of equity in Chinese firms as capital for investment into these companies was only decided on a case by case basis, usually at a provincial level, said Yan Geng of Pinsent Masons, the law firm behind Out-Law.com.

She said that the publication of the Interim Provisions of the Ministry of Commerce for Equity Contribution of Foreign-invested Enterprises will give welcome flexibility for foreign investors.

"Foreign investors will find greater flexibility in restructuring their assets in China if equity contribution is made available as an additional means for capital injection," said Geng. "With the promulgation of these provisions, it is expected that the approval process for equity contributions will become more standardised and streamlined."

Until the provisions were introduced the only non-monetary capital contributions that could be invested in FIEs according to PRC Company Law were tangible assets, intellectual property and land-use rights. The provisions are the most detailed rules available on how  equity contributions will be governed.

MOFCOM's provisions include details about the scope of the provisions; the qualification requirements for contributing equity; the mandatory valuation and pricing of equity and other details of the operation of the scheme. In-kind capital contributions such as equity contributions form part of the non-monetary capital of a company. This is capped at 70% of the total registered capital of the company.

In practice, equity contribution is possible if it is approved by MOFCOM.  So that, we could not exclude it from non-monetary capital contributions.  But if it is according to PRC Company Law, it is the truth that equity contribution is not included.

 It is the detailed rules from MOFCOM, but not the first.  State Administration of Industry and Commerce (SAIC) has released one as well, but not as significant as this one. MOFCOM is in charge of approval, and SAIC is in charge of registration. 

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