Swap shop

The PRC Company Law (中华人民共和国公司法), amended in 2005, generally permits a shareholder to contribute any freely-transferable non-monetary asset of an economic value to the registered capital of a company. In practice, however, the Administrations for Industry and Commerce (AICs), the company registration authorities in China, have been reluctant to admit creditor's rights as an asset eligible for capital contribution. A debt-for-equity swap, in other words the conversion of creditor's rights (debt) into the registered capital of that company (equity), is possible only in special circumstances (such as for the restructuring of debt-swamped state-owned enterprises) or in special regions, such as Chongqing Municipality, Ningxia Autonomous Region, Tianjin Municipality, Kunming Municipality and Zhejiang Province, where local AICs have published relevant rules applicable to local companies. Nationwide, most AICs have not endorsed such transactions due to the lack of national regulations.

On November 23 2011, the State Administration for Industry and Commerce (SAIC) issued the Measures for the Administration of the Registration of Debt-for-equity Swaps of Companies (公司债权转股权登记管理办法), which became effective on January 1 2012. The Measures open the gate for proper debt-for-equity swaps to be registered with local AICs. Their impact will gradually surface in private equity investment, debt restructuring, tax planning and other areas.