In light of China’s registered capital reform it is not only the year of the horse, it is the year of the foreign investor.
By virtue of China’s rapidly developing economy it is unsurprising that it provides an idyllic landscape for the prospective investor, holding many a financial benefit. However, it hasn’t always been easy for persons alien to the People’s Republic to make a break into the Chinese market, given China’s somewhat restrictive Company law.
Nonetheless, as of March 2014, following the amendments of The Standing Committee of the National People’s Congress, prospective investors have been given the opportunity to make the step up to ‘investors proper’.
The most significant changes are as follows.
Abolition of minimal capital requirements
Arguably the most exciting reform for the foreign investor is the removal of the minimum capital requirements, necessary when investing in China. Registered capital itself refers to the amount of contribution paid in by the shareholders upon establishment of the company and is registered with the Company Registry. The old law provided the following thresholds, each dependent on the structure of the company; limited liability companies (Rmb 30,000), limited liability companies with a single investor (Rmb 100,000) and companies limited by shares (Rmb 5 million). However, under the new law, these thresholds have been eradicated leaving any capital requirements at the discretion of the shareholder. The impact made by this reform is both obvious and significant in that it gives much greater flexibility to the shareholders and will undoubtedly reduce the cost of starting a company in China – obvious encouragement for investment.
Timing and form of contribution
Alongside the Standing Committee’s removal of minimum contribution thresholds, they have provided a revision of both the timing in which contributions must be made and the form that said contributions must take. In terms of timing, formerly, it was required that capital contributions must be made within two years of establishment. This is no longer the case, as timing requirements no longer exist under the new law. Again, this only ensures that shareholders are empowered further, in that, it is they who now have the ability to set specific timing limitations. Nonetheless, what will be of particular interest to investors is the fact that as a result of the new legislation, their registered capital is no longer required to be a minimum 30% cash. In fact, no cash is necessary (at least in theory), but may in fact take the form of IP, machinery or indeed, workforce. Evidently this will induce further investment, given that an investor my use alternative assets other than cash to invest, however, there does remain restrictions on what qualifies as capital.
‘Paid-In’ Capital replaced by Subscription Capital
The investor is no longer required to have the capital available at the time of registration. Instead the investor may merely ‘subscribe’ to a particular capital investment. Essentially, this imparts a more enticing prospect in that there is no worry of whether enough capital may be released prior to investment. Although such a method appears to be no more than a ‘promise’ made by the investor, the timing and amount of the cash contribution remains at the discretion of the shareholders.
Annual Inspection replaced by Annual Reporting
Given that prior to the reform, the minimum capital requirements provided security for creditors – in that it ensured each company had a ‘basic worth’, its’ abolition means that creditors are left open to fraudulent companies failing to disclose all of the relevant financials. As a result, the new Annual reporting system is of great significance. Previously, each company was subject to a yearly inspection, which was exceptionally time consuming for the inspectorate. On the contrary, companies are now required to submit annual reports, which will subsequently be open to public inquiry. As has been proven in many common law jurisdictions, this lends to a much more transparent marketplace, as far as business is concerned. Creditors will be thankful of this reform given that they are provided with an alternative form of security in that they can easily access a company’s financials, as opposed to depending of the ‘bona fides’ of the company itself.
The PRC appear to have become less restrictive in terms of their laws governing investment from overseas. The nature of the reforms will undoubtedly mean that China’s economy will continue to grow exponentially, and, by virtue of the topic in question, China will diversify both economically but also culturally. From the standpoint of those intending to invest in the PRC, the new reforms have paved a direct path into a land full of both promise and certainly return.
About the Author
Ryan Doodson is a final year law student at the University of Leeds and has recently spent a moth in Shanghai working for China’s largest law firm – Dacheng Law Offices. He hopes to qualify into the Commercial Legal Sector.