Foreign-funded Investment Companies Allowed to Use its RMB Income to Directly Invest in Other Companies

On December 8, 2011, the Ministry of Commerce (“MofCom”) and the State Administration of Foreign Exchange (“SAFE”) jointly issued the Notice on Further Improving the Administrative Measurers for FICs (Decree No. 1078 [2011]).  The purpose of this Notice is to simply the procedures for foreign-funded investment companies in domestic reinvestment.

Prior to the release of this Notice, when a FIC planned to invest in Chinese companies with its lawful RMB income, such as its operations profits and investment proceeds derived from capital decrease, liquidation or transfer of equity, it had to first obtain a governmental approval to increase its registered capital by converting such RMB income into its registered capital.  Upon such approval, it would be allowed to use the increased capital to make further investment.  Under the new rule, however, the requirement of capital increase has been eliminated.  In other words, FICs may directly use its legitimate RMB income to invest in other Chinese companies (upon applicable approval, of course) without having to convert the RMB income into its registered capital.  China has promised to provide a fair and transparent investment environment for foreign companies, and this Notice is another example of the government’s numerous actions to keep its promise.

The Notice has nonetheless reinforced that FICs may not use domestic bank loan in reinvestment. A FIC is a company organized in China and owned by foreign companies with convertible currency as registered capital which engages in direct reinvestment.   

Posted by: Pei Zhang

Categories: China Desk