Notice of the National Development and Reform Commission, the People's Bank of China, the Ministry of Finance and Other Ministries and Commissions on the Specific Policy Issues concerning the Implementation of the Market-Oriented Debt-Equity Swaps of Banks

· Document Number：No. 152 [2018] of the National Development and Reform Commission

· Area of Law： Banking & Finance

· Level of Authority： Departmental Regulatory Documents

· Date issued：01-19-2018

· Effective Date：01-19-2018

· Status： Effective

· Issuing Authority： State Development & Reform Commission (incl. former State Development Planning Commission) People's Bank of China Ministry of Finance

Notice of the National Development and Reform Commission, the People's Bank of China, the Ministry of Finance and Other Ministries and Commissions on the Specific Policy Issues concerning the Implementation of the Market-Oriented Debt-Equity Swaps of Banks
(No. 152 [2018] of the National Development and Reform Commission)
All banks and all market-oriented debt-equity swap implementation institutions:
For the purposes of thoroughly studying and implementing the Xi Jinping Thought on Socialism with Chinese Characteristics in a New Era and the spirit of the 19th CPC National Congress, implementing the deployments of the National Financial Work Conference and the Government Work Report, effectively promoting the smooth implementation of the Opinions of the State Council on Actively and Appropriately Reducing the Leverage Ratios of Enterprises (No. 54 [2016], State Council, hereinafter referred to as the “Opinions”) and the Notice on Effectively Completing the Relevant Work of Market-Oriented Debt-Equity Swap of Banks (No. 2792 [2016], NDRC), and effectively resolving the specific problems and difficulties encountered in the work of market-oriented debt-equity swaps of banks (hereinafter referred to as “market-oriented debt-equity swaps”), with the approval of the State Council, the relevant matters are hereby further specified as follows and you are hereby notified of the relevant matters:
I. Allowing to adopt the comprehensive plans integrating equities with debts to reduce the leverage ratios of enterprises. All implementation institutions may, according to target enterprises' objectives of reducing the leverage ratios, design the comprehensive leverage reduction plans that integrate equities with debts and that are dominated by equities, and allow qualified and phased equity swaps. Market-oriented debt-equity swaps shall be encouraged to be conducted by the mode of debt-equity swap, and the information shall be submitted according to the requirements for market-oriented debt-equity swap projects where the plans include offsetting with equities or arrangements of repaying debts by offering shares.
II. Allowing implementation institutions to establish private equity investment funds to conduct market-oriented debt-equity swaps. Private equity investment funds established by various kinds of implementation institutions may raise funds from qualified investors and shall satisfy the relevant regulatory requirements. Qualified financial management products of banks may, in accordance with the laws and regulations, contribute capital to the private equity investment funds established by the implementation institutions. Private equity investment funds established by implementation institutions shall be allowed to cooperate with target enterprises to establish sub-funds, and conduct market-oriented debt-equity swaps for high-quality subsidiaries of target enterprises. Implementation institutions and equity investment institutions shall be supported in establishing special private equity investment funds for market-oriented debt-equity swaps.
III. Regulating the implementation institutions' market-oriented debt-equity swaps by the mode of repaying debts by offering shares. When conducting market-oriented debt-equity swaps by the mode of repaying debts by offering shares, the implementation institutions shall specify the specific debts to be repaid in the market-oriented debt-equity swap agreements, and repay debts in a timely manner after the funds are available.
IV. Supporting enterprises of various ownerships in carrying out market-oriented debt-equity swaps. Relevant market participants shall, according to the policy orientation of the state, indecently determine the target enterprises for market-oriented debt-equity swap, without restricting the ownership of target enterprises. Various non-state-owned enterprises in compliance with the provisions of these Opinions, such as private enterprises and foreign-funded enterprises, shall be supported in carrying out market-oriented debt-equity swap.
V. Creditor's rights of other types other than bank's claims shall be allowed to be included into the scope of debt to be swapped. The scope of debt to be swapped shall mainly be the creditor's rights formed by the loans granted by banks to enterprises, with appropriate consideration given to other types of creditor's rights, including but not limited to the creditor's rights of loan of finance companies, creditor's rights of entrusted loans, creditor's rights of financial lease and profit-oriented creditor's rights, excluding creditor's rights formed by private lending. In principle, the scope of creditor's rights purchased by implementation institutions under banks through market-oriented debt-equity swaps or debts repaid shall be limited to bank loans, and appropriate consideration shall be given to other types of creditor's rights of banks and creditor's rights of non-banking financial institutions.
VI. Implementation institutions shall be allowed to accept creditor's rights of various quality grades. The implementation institutions under banks, financial asset management companies, state-owned capital investment and operation companies and insurance asset management institutions may accept creditor's rights of various quality grades for the purpose of market-oriented debt-equity swap, including banks' normal loans, special-mentioned loans and non-performing loans; banks may transfer creditor's rights of banks of various quality grades for the purpose of market-oriented debt-equity swap to their subordinate implementation institutions, financial asset management companies, state-owned capital investment and operation companies and insurance asset management institutions, including banks' normal loans, special-mentioned loans and non-performing loans; and banks shall transfer loans to implementation institutions as per the fair value and write-off the discount losses formed by transfer according to the provisions.
VII. Listed companies and unlisted public companies shall be allowed to issue equity financing instruments to conduct market-oriented debt-equity swap. Qualified listed companies and unlisted public companies may raise funds to repay debts through issuance of ordinary shares, preferred stocks or convertible bonds, among others to implementation institutions.
VIII. Creditors' rights of banks of unlisted non-public joint stock companies shall be allowed to be swapped to preferred stocks on a pilot basis. In accordance with the relevant provisions of the Opinions on the conditions for swaps determined upon independent consultation by and between the implementation institutions and enterprises, the implementation institutions may swap creditor's rights to preferred stocks of unlisted non-public joint stock companies; and prior to the formal issuance of policies concerning to the offering of preferred stocks by unlisted non-public joint stock companies, for market-oriented debt-equity swap projects of unlisted non-public joint stock companies intending to swap debts to preferred stocks, the implementation institutions must submit plans to the Office of the Inter-Ministerial Joint Meeting for Active and Reliable Reduction of Enterprises' Leverage Ratios (hereinafter referred to as the “Inter-Ministerial Joint Meeting”), and shall implement them on a pilot basis upon consent.
IX. Encouraging the Innovation on Regulated Market-Oriented Debt-Equity Swap Model. Banks, implementation institutions and enterprises shall be encouraged to conduct exploration and innovation on market-oriented debt-equity swap operation methods, fund raising, enterprise reform and other aspects under the institutional framework, and give priority to adopting business models with good comprehensive effect for deleveraging, reducing costs, promoting reform, and promoting transformation. The market-oriented debt-equity swap innovation models for which the requirements of the policies currently in force are not clear or the policies currently in force need to be adjusted shall be submitted to the Office of the Inter-Ministerial Joint Meeting and be implemented upon research and feedback by the Office of the Inter-Ministerial Joint Meeting in conjunction with the relevant departments.
X. Regulating the management of the submission of information on market-oriented debt-equity swap projects. For integrated deleveraging plans combining equity and debt, the total agreed amount and the amount of enterprise's equity interests intending to be ultimately increased shall be submitted when a framework agreement is signed, and the latter shall be the debt-equity contract amount; the amount of in-place funds and increased amount of enterprise's equity interests shall be submitted when the funds are available; and the amount of equity recognized by an accounting firm shall be submitted as the amount of actual equity swap when all equity swaps agreed are completed. When submitting information on debt-equity swap projects, the implementation institutions shall clearly specify the nature of the agreement entered into with the enterprises and include the amount of the substantive contract with legal binding force in the contract amount, and shall no longer include the intentional marketing agreed amount in the contract amount.
The Inter-Ministerial Joint Meeting shall organize and coordinate the accelerated implementation of the relevant policies in the Opinions. To implement the tax policies, qualified market-oriented debt-equity swap enterprises may, according to the provisions, enjoy the preferential tax policies concerning to restructuring of enterprises; to meet the actual needs of the market-oriented debt-equity swap business, the relevant departments shall study and adopt appropriate support methods to motivate and direct the market-oriented debt-equity swaps, and provide relatively stable, low-cost medium- and long-term financial support for the relevant banks and implementation institutions according to the market-oriented debt-equity swap business scale, in-place rate, deleveraging quality and other factors; and under the premise of preventing loss of state-owned assets, the marketization degree of pricing of equity swaps of state-owned enterprises shall be enhanced, pricing of equity swaps of state-owned listed companies shall be allowed to be determined by referring to the trading price on the secondary stock market and pricing of equity swaps of unlisted state-owned enterprises shall be allowed to be determined by referring to the competitive market quotations or other fair prices.
National Development and Reform Commission
People's Bank of China
Ministry of Finance
China Banking Regulatory Commission
State-Owned Assets Supervision and Administration Commission of the State Council
China Securities Regulatory Commission
China Insurance Regulatory Commission
January 19, 2018