subject: The Financing Pattern Of Foreign Investment Enterprises -- Loan [print this page] At present, there is a universal downturn in global economy, whereas Chinese economy is overflowing with vigor, thus no doubt Chinese market is attracting more foreign investors. Foreign investors in growing numbers begin to seek financing in China. This essay will brief on the operational approach when foreign investors cant get a local bank loan and then turn to finance from shareholders, so as to provide a reference for the other similar cases.
1. Foreign-funded enterprises raise a loan from domestic natural person
According to the related judicial interpretation of the Supreme Court in China, foreign-funded enterprises can raise a loan from domestic individuals. But because there cannot be natural person who has Chinese nationality in Sino-foreign joint ventures and Sino-foreign cooperative enterprise, foreign-funded enterprises cant raise a loan from them. This means foreign-funded enterprises cannot raise a loan from a domestic natural person unless that the natural person has foreign nationality.
2. Foreign-funded enterprises raise a loan from a domestic fictitious person, enterprises and other economic organization shareholders.
According to Chinese related laws or regulations, financial institutions can run finance loan business, that non-financial institutions run finance loan business is forbidden. So, unless Chinese shareholders in Sino-foreign joint ventures and Sino-foreign cooperative enterprises have financial institutions, otherwise Sino-foreign joint ventures and Sino-foreign cooperative enterprises are unable to raise a loan from them.
3. Foreign-funded enterprises raise a loan from foreign fictitious person, enterprise or nature person.
According to the regulations on the foreign exchange system of the Peoples Republic of China, Foreign-funded enterprises may raise a loan from foreign fictitious person, enterprise or nature person. But the premise is the registered capital shall be invested timely. Any borrowed fund shall be taken as foreign debt. Because its grant the excess national treatment to foreign investment enterprise, one just need to register when raising a loan, no approval will be required. In practice, Foreign-funded enterprises shall sign the foreign fund contract then register with local administration of foreign exchange. Then local administration of foreign exchange control will issue the foreign debts registration document to the enterprises. The creditors right is guaranteed by the form of foreign guarantee. According relevant laws and regulations, the guarantee shall be provided by Chinese financial institutions (exempt foreign financial institutions in China) in the form of guarantee letter, standby letter of credit, promissory note, bills of exchange , mortgages to foreign parties of property stipulated under the Security Law and pledges to foreign parties of moveable property stipulated under the Security Law, as undertakings to organizations outside China or foreign-invested financial institutions within China that when the debtor fails to repay its debts as provided for in a contractthe Security Provider shall perform its obligation to pay the debts. The guarantee is lawful after applying for approval and submitting to the local Administration of Foreign Exchange. Besides, one also need to register the mortgage and pledge according to the relevant regulations, then you can against the third party and the secure claims and get the right of a creditor to priority.
It was generally acknowledged that dealing with the Administration of Foreign Exchange involves a lot of red tapes. But foreign investors can entrust professionals to handle related works, so that can provide legal safeguards for the loan act.
by: Sino-Link Consulting
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