• Debt for Equity Swaps for Foreign Investors
  • January 3, 2012 | Authors: Edward J. Epstein; Olivia Lee
  • Law Firms: Troutman Sanders LLP - Shanghai Office ; Troutman Sanders LLP - Hong Kong Office
  • The State Administration for Industry and Commerce ("SAIC") issued the new Draft Measures on Debt for Equity Swaps for Foreign Investors for public opinion in August 2011 and received submissions until September 2, 2011. On November 23, the final version of these regulations (the DES Measures) was released and becomes effective on January 1, 2012. 

    The DES Measures are virtually unchanged from draft measures released in August. Nevertheless, since these are the first general administrative regulations ever promulgated for debt-to-equity swaps, the DES Measures are noteworthy.  

    The DES Measures make clear that only limited liability or joint stock companies established in China are eligible to participate in these new arrangements.  Moreover, only contractual debts ordered by PRC courts after having been approved as part of a formal debt restructuring plan are permitted.  The DES Measures permit debt to be converted to a maximum of 70% of the registered capital of the debtor company.

    The DES Measures also require all debt-for-equity swaps to be certified by an accredited Chinese accounting firm which must issue a certificate of capital verification once the debt is converted. Every capital verification certificate must contain the following particulars:

    • Basic details concerning the debt, including the time and the factual circumstances of the debt, the names of the parties to the original contract(s), the subject matter of the contract, details about the performance of obligations under the contract;
    • The valuation of the debt, including the name of the valuator, document number of the valuator’s report, and the date on which the valuation was carried out;
    • Information on the debt-for-equity swap, including the signed agreement on debt-for-equity swap, the discharge of corresponding debt, and details concerning the relevant accounting treatment of the debtor; and
    • Other details as required by law.

    Until a number of these debt-for-equity swaps have been successfully carried out, it will be difficult to speculate on the effectiveness of the DES Measures.  Any debt-to-equity swaps that are approved will be carried out in accordance with the Foreign Investment Guidance Catalog and other Chinese laws and regulations so it is unlikely that the DES Measures will enable foreign investors to secure stakes in state-owned companies in restricted industries.