Strategy
By Rainy Yao, Maria Kotova and Matthew Zito:
In China, the Company Law stipulates that all enterprises, foreign-invested or otherwise, must register a fixed level of operational capital with the relevant authorities—deemed the company’s “registered capital”—as part of the basic corporate establishment process. Owing to strict foreign exchange controls, a foreign company’s registered capital is often the only funds it has access to for paying its operational expenses prior to becoming cash flow positive.
This core piece of information is contained within a company’s articles of association and printed on its business license, making it somewhat burdensome to modify. Nevertheless, for a variety of reasons, it is sometimes necessary (or beneficial) for a company to increase or decrease its registered capital. Doing so requires filing an application with the original Administration of Industry and Commerce (AIC) of registration, with the procedure strongly differing between an increase or decrease. Like other types of company registered information (name, business scope, etc.), changes of registered capital are publicly accessible via AIC records.
Until recently, foreign investors were required to carefully estimate the amount of registered capital needed, as they were obliged to pay in the total amount within two years. However, pursuant to the revised Company Law implemented on March 1, 2014, the time-frame for capital contributions has been eliminated, as well as any minimum levels of registered capital. Therefore, investors may now decide on both the amount of registered capital (also called “subscribed capital”) and the period of capital contributions; however, these remain contingent upon approval from local government authorities.
Increase of Registered Capital
Generally, companies increase their registered capital for three types of reasons: financial, strategic and regulatory. Under the first category, the most common of the three, companies often underestimate their capital requirements and simply run out of money to conduct operations in China. As noted, this problem is especially severe for companies that have yet to become cashflow positive. Because an FIE’s ability to take out loans is pegged to its amount of registered capital (see chart), an increase in the latter can widen the company’s borrowing quota and allow for an inflow of additional capital.
Strategic reasons include using a higher registered capital to attract potential clients or investors, or to demonstrate the company’s fiscal capacity during bidding for a certain project; because registered capital is publicly accessible information, it can be used to evaluate the company’s competitiveness.
Prior to the adoption of the revised Company Law, both registered capital and paid-in capital were displayed on a company’s business license. Newer licenses, however, display only the company’s “subscribed capital” (i.e. registered capital). This has created a dual system in which a company’s registered information is differently available for public access based on when its business license was issued. Otherwise, a company may also use an increase of registered capital to adjust its shareholder structure or shareholder ratio through modifying the contributions of individual investors.
Lastly, in some cases a company is legally required to increase its registered capital, as when expanding its business scope, opening a branch company, acquiring special licenses, or to fulfill other qualifications (e.g., a listed company must have a registered capital of over RMB30 million).
Step 1 — The company must provide a reasonable explanation for the increase in registered capital to MOFCOM and obtain its approval.
Step 2 — The company should file an initial application with the original AIC of registration within 30 days of the decision to increase registered capital. This requires its business license and the ID card of the legal representative (or an entrusted party). If the increase is more than 20 percent of the original registered capital, the funds must be verified by a legally authorized audit or accounting firm.
Step 3 — The company must apply to the original AIC of registration for a new business license. This requires the following (in both original and duplicate):
• An application form (as obtained in Step 1)
• Proof of the applicant’s legal authorization
• A legal resolution or decision specifying the increase to be made
• The revised contract and charter (only applicable to partnership enterprises)
• The revised articles of association signed by the legal representative
• A capital verification report (as obtained in Step 2)
• Other relevant materials
• A copy of the previous business license
Note: Where a company limited by shares increases its registered capital by way of a public or non-public issuance of new shares, it is required to obtain the approval of the China Securities Regulatory Commission. All materials should be translated into Chinese and affixed with the seal of a translation company.
Step 4 — The company should transfer the additional capital directly into its capital account. The company must also pay a fee for the increase of registered capital, which varies according to the chart below.
Aug 13, 2014