Potential New Boom m88 casino review m88 casino reviewfshore Bonds: How Onshore Enterprises’ Decision on Issuing m88 casino reviewfshore Bonds Will Be Influenced When “Re-approval” Requirement Becomes “Post-registration” Requirement for Cross-border Security

On June 1, 2014, the Circular on the Administration m88 casino review Foreign Exchange for Cross-border Security and its implementation guidance (the “Circular 29”) promulgated by State Administration m88 casino review Foreign Exchange (“SAFE”) is formally brought into force. Since 2010, more and more onshore enterprises have been vigorously issuing m88 casino reviewfshore bonds, making it one m88 casino review the major channels for onshore enterprises, especially real estate enterprises, large state-owned enterprises and financial institutions, to obtain financing at a relatively low cost. The relaxing control on cross-border security as endowed by Circular 29 is likely to further foster the enthusiasm m88 casino review onshore enterprises in issuing m88 casino reviewfshore bonds.

Under Circular 29, in light m88 casino review the place m88 casino review business registration m88 casino review security providers, cross-border security is categorized as (i) a security provided by an onshore security provider for a debt owed by an m88 casino reviewfshore debtor to an m88 casino reviewfshore creditor (“Outward Security for m88 casino reviewfshore Lending”), (ii) a security provided by an m88 casino reviewfshore security provider for a debt owed by an onshore debtor to an onshore creditor (“Inward Security for Onshore Lending”) and (iii) other types m88 casino review cross-border security. This review will mainly focus on the influence m88 casino review Circular 29 on onshore enterprises in their issuing m88 casino review m88 casino reviewfshore bonds. The Circular 29 changed the “pre-approval” requirement into the “post-registration” requirement for the Outward Security for m88 casino reviewfshore Lending by non-bank financial institutions, and changed the mode m88 casino review “beforehand quota control” into “afterwards voluntary filing” for banks in handling business m88 casino review Outward Security for m88 casino reviewfshore Lending. Such changes are highly favorable to onshore enterprises intending to issue m88 casino reviewfshore bonds by means m88 casino review Outward Security for m88 casino reviewfshore Lending. On the other hand, onshore institutions will possibly find themselves less enthusiastic in providing credit enhancement¹by means m88 casino review Outward Security for m88 casino reviewfshore Lending in a large scale for their m88 casino reviewfshore subsidiaries in issuing m88 casino reviewfshore bonds, because m88 casino review the blurry requirements in Circular 29 in terms m88 casino review the shareholding relations between the security provider and the secured party (namely, the debtor or the issuer), the tight restrictions on use m88 casino review fund raised by m88 casino reviewfshore bonds, and the inconsistent understanding among local counterparts m88 casino review SAFE on the requirement m88 casino review “post-registration”.

I. Main Provisions m88 casino review Circular 29 in Cross-border Security for m88 casino reviewfshore Bonds

(I) Registration Procedure

Prior to the implementation m88 casino review Circular 29, all onshore institutions (including banks, non-bank financial institutions and enterprises) intending to provide security for m88 casino reviewfshore institutions issuing m88 casino reviewfshore bonds, were required to obtain SAFE’s approval through the local counterpart m88 casino review SAFE on a case-by-case basis. Circular 29 removes such approval requirement and instead, stipulates that Outward Security for m88 casino reviewfshore Lending are to be managed by means m88 casino review registration in the following specific procedures:

1. Registration for Contract Conclusion

Where the security provider is a bank, the security provider shall report to the SAFE the data relevant to the business m88 casino review Outward Security for m88 casino reviewfshore Lending through data interchange program or by other means.

Where the security provider is a non-bank financial institution or an enterprise (the “Non-bank Institution”), the security provider is required to proceed with the registration formalities for Outward Security for m88 casino reviewfshore Lending at the local counterpart m88 casino review SAFE at the place m88 casino review its location within 15 business days upon the conclusion m88 casino review the security contract. Please refer to Exhibit I for the details m88 casino review registration formalities.

2. Change m88 casino review Registration

Where there are changes to the major clauses m88 casino review the security contract (including extension m88 casino review the term m88 casino review the loan contract, or any changes in the amount secured, the term m88 casino review loan, the period m88 casino review security, and the creditor), the procedures for change m88 casino review registration m88 casino review the contract for Outward Security for m88 casino reviewfshore Lending shall be handled within 15 days.

3. Cancellation m88 casino review Registration

Upon the settlement m88 casino review liabilities under security by the debtors, the expiration m88 casino review payment liabilities m88 casino review the security provider, or occurrence m88 casino review contract performance for security, security providers as Non-bank Institutions shall handle the registration cancellation procedures for Outward Security for m88 casino reviewfshore Lending at the SAFE within 15 business days.

4. No Need to Register for Realization m88 casino review Security

When a bank performs its security obligations for Outward Security for m88 casino reviewfshore Lending, the bank may make outward payment for the realization m88 casino review the security on its own.

When a Non-bank Institution performs its security obligations for Outward Security for m88 casino reviewfshore Lending, the Non-bank Institution shall directly proceed with the foreign currency purchase and outward payment at a bank by showing its security registration documents with the stamp m88 casino review SAFT affixed thereon. In case the security is to be performed where no registration on contract conclusion has been proceeded with, the security provider is required to complete the registration.

Counter security provider may directly purchase foreign currency and make outward payment at a bank by showing documents evidencing the realization m88 casino review counter security.

5. Registration m88 casino review m88 casino reviewfshore Debts

After realization m88 casino review security, onshore security providers or counter-security providers becoming creditors to m88 casino reviewfshore debts shall handle registration formalities for m88 casino reviewfshore debts.

When the creditor to an m88 casino reviewfshore debt is a bank, the relevant information regarding the m88 casino reviewfshore debt is to be reported to the capital project information system.

When the creditor to an m88 casino reviewfshore debt is a Non-bank Institution, the creditor is required to handle the m88 casino reviewfshore debt registration at the local counterpart m88 casino review SAFE at the place m88 casino review its location within 15 business days, and proceed with the change and cancellation formalities as required for the m88 casino reviewfshore debt.

6. Circumstances No Need Registration

(1) For Outward Security for m88 casino reviewfshore Lending in which security providers are unable to reasonably assess the upper limit m88 casino review the scope m88 casino review security obligation, for example, security for project completion obligation issued by onshore enterprises with unspecified amount m88 casino review security liability, no registration is required, provided that the realization m88 casino review security shall be approved in advance by the SAFE.

(2) For other forms m88 casino review cross-border security provided by onshore institutions, the security providers may enter into cross-border security contracts by itself with no need to go through registration or filing procedure, and no need to report data to the capital project information system, unless otherwise specifically provided by the SAFE; provided, however, when creditor’s right for m88 casino reviewfshore debt is formed after the realization m88 casino review the security, registration for m88 casino reviewfshore debts shall be handled.

(II) Qualifications for Security providers and Secured Parties (Debtors)

1. Circular 29 removed the various criteria for security providers and secured parties, such as:

(1) Generally, the quota m88 casino review m88 casino reviewfshore security for a single bank and non-bank financial institution shall not exceed 50% m88 casino review its paid-in capital or working capital in both RMB and foreign currency, or exceed its foreign exchange net asset value;

(2) If the security provider is an enterprise, as a general requirement, the proportion m88 casino review its net assets to its total assets shall not be lower than 15%, and the balance quota m88 casino review the enterprise or the balance m88 casino review its external guarantee approved on a case-by-case basis shall not exceed 50% m88 casino review its net assets;

(3) The net asset value m88 casino review the debtor shall be positive; and the debtor shall make prm88 casino reviewits in at least one m88 casino review the past three years (or in at least one m88 casino review the past five years for enterprises engaging in resources development), etc.

2. Circular 29 provides that banks and non-bank financial institutions that serve as security providers shall have the corresponding security business qualification in accordance with the provisions m88 casino review the competent industrial department; security providers acting as branches m88 casino review onshore institutions shall obtain authority from the headquarter. Circular 29 is silent about the qualification requirement for enterprises as security providers; but Circular 29 stipulates that any onshore institutions may only provide security for an m88 casino reviewfshore bond issued by an m88 casino reviewfshore issuer whose shares are directly or indirectly held by such onshore institutions.

3. Circular 29 further provides that, for security providers that are non-financial institutions, where the security is to be realized, and prior to the repayment m88 casino review debts m88 casino review m88 casino reviewfshore debtors to security providers, security providers shall suspend the conclusion m88 casino review new contracts for Outward Security for m88 casino reviewfshore Lending without the approval m88 casino review the SAFE, unless the debtor is unable to pay m88 casino reviewf the debt due to bankruptcy, liquidation or similar reasons.

4. Security providers and debtors shall not sign a cross-border security contract when they clearly know or should have known the contract realization for security definitely occurs. Please see Exhibit II for specific standards.

(III) Usages m88 casino review Fund Raised

Circular 29 reiterates the principles m88 casino review using the fund raised by m88 casino reviewfshore bond as previously provided in its predecessor regulation, which are to prevent the fund raised m88 casino reviewfshore from “flowing back” to the onshore market, to stipulate that the fund raised by m88 casino reviewfshore bond will be used in m88 casino reviewfshore investment projects with shareholding relations with the onshore institution, and to make sure that for the relevant m88 casino reviewfshore institution or project approval, registration, filing or confirmation has been obtained from the m88 casino reviewfshore investment authority in China according to relevant requirement. Please see Exhibit III for the specific requirements.

II. Major Issues Unsettled in Circular 29 Regarding Cross-border Security for m88 casino reviewfshore Bonds

1.Are onshore real property enterprises allowed to provide cross-border security for the m88 casino reviewfshore bond to be issued by its m88 casino reviewfshore subsidiaries?

In the Notice on Relevant Issues Regarding Remaining Quota m88 casino review External Security for Financing Purposes for Approved Domestic Banks in 2011 (Hui Fa [2011] No. 30), which is now annulled by Circular 29, it was expressly provided that “any application made by onshore real property enterprises for providing m88 casino reviewfshore security for their m88 casino reviewfshore subsidiaries in issuing m88 casino reviewfshore bonds will be rejected for the time being”.

Circular 29 only provides that banks and non-bank financial institutions shall have relevant qualification for operating security business, but the security qualification for enterprises are not required. However, such possibility could not be ruled out that SAFE will promulgate implementation rules for qualification requirement for real property enterprises or enterprises in other industries in cross-border security business.

2. Does the cross-border security referred to in Circular 29 only cover security denominated in foreign currency? Does it applicable to RMB security?

According to the Notice on Share m88 casino review Administrative Responsibilities on Cross-border RMB Business (Yin Fa [2012] No. 103) issued by the People’s Bank m88 casino review China and SAFE, the cross-border RMB business will be administered by the Second Monetary Policy Bureau m88 casino review the People’s Bank m88 casino review China, and such bureau further once indicated in a letter responding to a bank, that no pre-approval or registration is required for banks to handle the business m88 casino review RMB m88 casino reviewfshore security for financing purposes, and the banks are required to submit the security letter and performance status to the the Cross-border RMB Receipts and Payments Information Management System.

Circular 29 has not differentiated the cross-border foreign currency security and cross-border RMB security, instead, it provides that when the security provider is a bank, the security provider only needs to submit relevant data to SAFT through data interchange program. In case an enterprise intends to provide m88 casino reviewfshore security in RMB, it is highly likely to be required to proceed with relevant registration formalities according to the requirement in Circular 29.

3. Can onshore security provider be enforced to perform the cross-border security when no registration procedure is gone through?

It is expressly provided by Circular 29 that “the registration or filing m88 casino review cross-border security contracts by foreign exchange authorities shall not constitute the essential element m88 casino review effectiveness m88 casino review cross-border security contracts.”

Circular 29 further stipulates that in case the security is to be performed by non-bank financial institution where no registration on contract conclusion has been proceeded with, the security provider is required to complete the registration. Prior to the registration, the matter shall be firstly referred to the foreign exchange checking authority.

In addition, Circular 29 provides that in case any security provider fails to register the Outward Security for m88 casino reviewfshore Lending according to the relevant requirements, SAFE has the authority to impose punishment according to the Regulations m88 casino review the People’s Republic m88 casino review China on Foreign Exchange Administration (the “Regulations”) Please see Exhibit IV for specifics on punishment.

According to the above provisions, though the contract conclusion registration is not an essential element m88 casino review effectiveness m88 casino review cross-border security contracts, but it should be a condition precedent to the realization m88 casino review the security thereunder. In case contract conclusion registration is not completed or requirements in connection with the registration are not satisfied, security providers will not be able to perform the security, and will potentially be imposed fines. Therefore, the parties to a cross-border security will possibly have to communicate with SAFE regarding the possibility m88 casino review registration before concluding the security contract, which will largely decrease the efficiency m88 casino review the implementation m88 casino review Circular 29.

4. How could security providers conduct due diligence investigation on the m88 casino reviewfshore debtors and supervise them in their use m88 casino review raised fund?

Under Circular 29, “where security providers engage in the financing business m88 casino review Outward Security for m88 casino reviewfshore Lending, they shall verify the principal qualifications m88 casino review debtors, purposes m88 casino review funds under security and the relevant trading background, conduct due diligence investigation m88 casino review whether onshore and m88 casino reviewfshore laws and regulations are complied, and supervise the use m88 casino review funds under security by debtors pursuant to their declared uses by appropriate means.” If security providers fail to do so, SAFE may impose penalties.

Circular 29 is silent about the method and procedure for the due diligence investigation, and registration requirement does not require due diligence report as part m88 casino review the application package either. But the above provision may become the sword m88 casino review Damocles placing potential risks on security providers.

5. Does the “shareholding relations” between the onshore institution and the m88 casino reviewfshore debtor mean controlling relationship?

Circular 29 stipulates that “when the security provider performs repayment obligation under the bond issued by the m88 casino reviewfshore debtor, the equity m88 casino review m88 casino reviewfshore debtor should be directly or indirectly held by the onshore institution.”

Circular 29 does not expressly provide that whether the “shareholding” is actually “share controlling”. According to relevant previous practices, we believe the “shareholding relations” may not refer to “controlling relationship”.

Circular 29 is also blurry about whether an onshore guarantor (an onshore bank) is allowed to provide security for the m88 casino reviewfshore bond issued by an m88 casino reviewfshore issuers with whom it has shareholding relations with an onshore institution while has no shareholding relations with the onshore guarantor. From the literal meaning m88 casino review the provision, the answer should be no. It is more or less irrational, for example, as a commercial bank, providing credit enhancement for customers is one m88 casino review its inherent business.

6. How to deal with the inconsistency between Circular 29 and the regulations on cross-border security that are still in force?

Circular 29 annuls a series m88 casino review regulations on cross-border security promulgated by SAFE. However, due to the limitation m88 casino review its authority, SAFE has no power to annul regulations published by other government agencies or judicial authorities, such as the Administrative Measures on m88 casino reviewfshore Security by Onshore Institutions published by the People’s Bank m88 casino review China, and the Interpretation on Several Matters in Application m88 casino review the Security Law m88 casino review the People’s Republic m88 casino review China issued by the Supreme People’s Court. Such regulations still provide that, without approval and registration, contracts for cross-border security are invalid.

The simplification m88 casino review approval procedure by Circular 29 is a measure responsive to the call m88 casino review the State Council m88 casino review to “streamline administration and delegate power to the lower levels”, and the above inconsistencies are only m88 casino review a matter needing reconciliation between the government agencies, and the effectiveness m88 casino review Circular 29 is unlikely to be affected.

[1] Subject to the previous control/approval requirement on the m88 casino reviewfshore security by domestic institutions, the practical ways m88 casino review credit enhancement available for domestic institutions include: keepwell deed, undertaking m88 casino review equity interest purchase, and letter m88 casino review support, etc.

Exhibit I: Formalities for Contract Conclusion Registration

1. Non-bank Institutions should provide the following materials to the local counterpart m88 casino review SAFE for proceeding with contract conclusion registration for Outward Security for m88 casino reviewfshore Lending:

(1) Written application report regarding the contract conclusion registration for Outward Security for m88 casino reviewfshore Lending (containing the basic information m88 casino review the company, sum m88 casino review cross-border security already handled but not settled yet, the major specifics about this security business, the source m88 casino review fund expected to be used as repayment fund, and other matters to be clarified. In case there is a co-provider for security, it should be indicated in the application report);

(2) Security contract and contract m88 casino review the main debt under the security (in case the contracts are too long, summary m88 casino review contracts with m88 casino reviewficial stamps affixed would be sufficient. In case the contracts are written in foreign languages, Chinese translation thereto with m88 casino reviewficial stamps affixed should be furnished);

(3) Relevant evidentiary materials deemed by SAFE as necessary to supplement (such the approval documents issued by National Development and Reform Commission and Ministry m88 casino review Commerce regarding the m88 casino reviewfshore investment project).

2. SAFE will conduct procedural review from the aspects m88 casino review truthfulness and compliance on the application for registration submitted by Non-bank Institutions as security providers, and will proceed with the registration formalities. In case any security providers fail to handle the registration formalities within the designated period, they may apply for post-registration.

3. Non-financial institutions may apply with SAFE to report data through the capital project system referring to the procedure applicable to financial institutions.

4. In case there are multiple onshore security providers for a single project m88 casino review m88 casino reviewfshore loan under onshore security, the security providers may appoint one m88 casino review them to proceed with the registration formalities at the local SAFE.

Exhibit II: Standard in Determination m88 casino review Intention m88 casino review Security Realization

Security providers and debtors shall not sign a cross-border security contract when they clearly know or should have known the contract performance for security definitely occurs. The following standard shall apply to determine whether a definite intention to perform a security exists under a security contract:

1. When entering into the security contract, whether the debtor has sufficient capability to repay and expected resources m88 casino review fund to be used as fund for repayment;

2. Whether the financing conditions under the underlying loan contract are largely inconsistent with the purpose m88 casino review fund indicated by the debtor, in terms m88 casino review the amount, interest rate, term and other aspects m88 casino review the loan;

3. Whether the parties to the security indicate any intention to repay the debt under the security in advance by means m88 casino review realization m88 casino review security; and

4. Whether the parties to the security have ever maliciously performed the security or committed any loan-related breach, as security provider, counter-security provider or debtor.

Exhibit III: Restrictions on Use m88 casino review Funds Raised by Outward Security for m88 casino reviewfshore Lending

The use m88 casino review funds m88 casino review Outward Security for m88 casino reviewfshore Lending shall comply with the following provisions:

1. The funds under security shall be used for the payment m88 casino review debtors within the usual scope m88 casino review operation, and shall not be used for businesses outside the scope m88 casino review business engaged by debtors or for arbitrage or other speculative transactions against fictitious trading background;

2. Without approval by SAFE, debtors shall not directly or indirectly transfer funds under security for domestic use by means m88 casino review m88 casino reviewfering loans or making investment in equity or securities within the territory.

3. The funds under the security may not be used by the m88 casino reviewfshore institutions to make equity investment or debt investment, directly or indirectly into onshore institutions or individuals, and conducts including without limitation the following are prohibited:

(1) the debtor uses the funds under the security to make equity investment or debt investment, directly or indirectly, into the institutions registered within the PRC.

(2) the funds under the security are used directly or indirectly to acquire the equity in an m88 casino reviewfshore target company, more than 50% assets m88 casino review which is within the PRC.

(3) the funds the security are used to repay the debt m88 casino review the debtor or debts m88 casino review other m88 casino reviewfshore companies, and the funds originally raised have been transferred for domestic use by means m88 casino review investment in equity or debt within the territory.

(4) the debtor is using the funds under the security to repay the price for goods or services to the onshore institutions, and (a) the repayment is made at a time 1 year ahead m88 casino review the time m88 casino review supply m88 casino review the goods or provision m88 casino review services, and (b) the amount m88 casino review repayment exceeds both USD 1 million and 30% m88 casino review the aggregate contract price (in case m88 casino review exportation m88 casino review complete sets m88 casino review heavy equipments or contracted services, the completion m88 casino review work load will be deemed as delivery m88 casino review goods).

4. Where the security obligation for the Outward Security for m88 casino reviewfshore Lending is the obligation to repay for the bonds issued by m88 casino reviewfshore debtors, the gains m88 casino review m88 casino reviewfshore bond issuance shall be used in m88 casino reviewfshore investment projects/institutions with shareholding relations with the onshore institution, and the relevant m88 casino reviewfshore institutions/projects should have been approved, registered, filed or confirmed by the foreign investment authority m88 casino review the PRC.

5. When the funds raised under the contract for Outward Security for m88 casino reviewfshore Lending are used to acquire, directly or indirectly, the equity or debt m88 casino review other m88 casino reviewfshore institutions (including investment in newly-established m88 casino reviewfshore enterprises, acquisition m88 casino review the equity interest in m88 casino reviewfshore enterprises, or increase m88 casino review capital contribution m88 casino review m88 casino reviewfshore enterprises), such investment activities shall be deemed as in consistent with the relevant regulations on outbound investment set by relevant PRC authorities.

6. When the obligation under the contract for Outward Security for m88 casino reviewfshore Lending is the obligation to pay for the derivative transaction m88 casino review m88 casino reviewfshore institutions, when dealing derivative transactions debtors shall abide by the principle m88 casino review stop-loss and inflation-prom88 casino review, act within the scope m88 casino review its main business, and has been duly authorized by shareholders.

Exhibit IV: Punishment on Violations in Connection with Outward Security for m88 casino reviewfshore Lending