Investors choose convertible bonds instead of equity investment, mainly from the perspective of risk prevention, because, from the level, convertible bonds are more advanced than preferred stocks, and they can be given priority in compensation when the company's operating conditions are not satisfactory. At the same time, if investors adopt convertible bonds, there will be room for advancement and retreat. If the investor does not want to continue investing, he can ask the company to repay the principal. If they want to become shareholders of the company, they can exercise the conversion right and convert it into preferred stock or even common stock.
If an investor with a domestic background is assumed to be a legal person (company or limited partnership), then one of the main obstacles to adopting convertible bonds is the restriction on inter-enterprise lending. Lending between enterprises refers to the relationship of rights and obligations between enterprise legal persons other than banks, non-bank financial institutions and other enterprises engaged in financial business, or between enterprise legal persons and other social organizations without legal personality, or between social organizations without legal personality, because one party pays a certain amount of money to the other party, requiring the payee to return the same amount of money within the agreed time limit and pay a certain amount of interest or profit at the same time. At present, there is no clear legal or administrative basis for inter-enterprise lending, but there are judgments based on relevant national financial regulations or policies or relevant judicial interpretations. Judicial practice is generally considered invalid. Inter-enterprise loans can take various forms. For inter-enterprise loans directly expressed in the form of loan contracts, the court generally considers that it is invalid if it violates the relevant state financial management regulations (that is, the General Principles of Loans). However, due to the consideration of the effectiveness of the general principles of loans, some courts also regard the provisions of Item (4) of Article 52 of the Contract Law as invalid. For illegal loans called joint ventures, the court generally judges whether they are real joint ventures or not according to whether the lenders participate in joint operations and bear risks. In the judgment, the court often refers to the Answer to Several Issues Concerning the Trial of Disputes over Joint Venture Contracts (Fa [Jing] Fa [1990] No.27), o The relevant provisions of this judicial interpretation stipulate that "it is obviously a joint venture, but it is actually a loan, which violates relevant financial regulations and should confirm that the contract is invalid". For inter-enterprise loans in the form of entrusted financial management, such contracts generally have a guaranteed clause, and the trustee guarantees that the principal can get a fixed return on principal and interest regardless of profit or loss. According to Item (3) of Article 52 of the Contract Law, a contract that covers up an illegal purpose in a legal form is invalid, and the contract shall be deemed invalid. In addition, there are investment agreements, barter and prepaid purchase and sale, financial lease contracts and other forms. In fact, it is an illegal loan between enterprises, which is generally invalid according to the provisions of Item (3) of Article 52 of the Contract Law. Nowadays, in practice, for loans between enterprises, the court will generally order repayment of the principal, and will also order payment of interest calculated according to the bank loan interest rate or deposit interest rate for the same period. The agreed profit (or interest) will not be recovered regardless of whether it is obtained or not, and the borrower will not be fined equivalent to the interest of bank loans in the same period. Therefore, it is not feasible to realize the operation of convertible bonds through inter-enterprise lending.
However, one of the fundamental reasons for prohibiting inter-enterprise lending mentioned in -E is that lending is a financial business, which can only be carried out by licensed financial institutions, and non-financial institutions cannot charge loan interest. So, is interest-free dismantling feasible? 1998 13 In July, the State Council promulgated the Measures for Banning Illegal Financial Institutions and Illegal Financial Business Activities, which stipulated: Article 2 "All illegal financial institutions and illegal financial business activities must be banned"; Article 4 "Illegal financial business activities as mentioned in these Measures refer to the following activities without the approval of the People's Bank of China: …… (3) Illegal loan issuance, settlement, bill discount, borrowing funds, trust investment, financial leasing, financing guarantee and foreign exchange trading; Therefore, it can be seen that "capital lending" is also prohibited. However, some people think that the capital borrowing here is different from the capital borrowing between enterprises. Inter-enterprise lending is a temporary error in capital turnover between enterprises, which is different from overnight lending between financial institutions and does not constitute financial business. Moreover, on April 1995 and 17, State Taxation Administration of The People's Republic of China issued the "On Printing and Distributing (Answers to Business Tax Questions (I)) (Guo Shui Fa) [Moreover, in practice, there are also a lot of fund borrowing between enterprises, especially between affiliated companies. But objectively speaking, even so, there are still some legal risks for investors to borrow from the target company. Of course, you can also consider investing in creditor's rights through bank entrusted loans or trust entrusted loans to avoid the problem of borrowing between enterprises, and you can legally borrow and charge interest.
In addition, even assuming that borrowing or lending is feasible. Then, can the borrowed funds be converted into equity, that is, can debt-to-equity swaps be implemented? From the legal point of view, direct debt-to-equity swap can only be realized under several special circumstances. The first is that as a policy-oriented debt-to-equity swap enterprise, the financial debts owed can be converted into shares through the pilot enterprises of debt-to-equity swap recognized by the former State Economic and Trade Commission, which are usually held by asset management companies. Second, the debt-to-equity swap measures implemented by China Securities Regulatory Commission to solve the problem of arrears of major shareholders. Third, according to Article 162 of the Company Law, a listed company may issue corporate bonds convertible into shares by resolution of the shareholders' meeting, and the specific conversion method is stipulated in the measures for raising corporate bonds. In addition, there are obstacles in the practice of directly converting creditor's rights into equity. Because in accordance with the Regulations on the Administration of Company Registration and related regulations, especially the requirements of the industrial and commercial authorities, the capital contribution to obtain equity must be paid to the designated account by the shareholders who subscribe for the capital contribution or the assets are transferred to the company to complete the capital contribution and obtain equity, and the capital contribution cannot be replaced by debt relief. In other words, from the current practice, debt cannot be directly financed. In this case, there is an alternative: someone provides bridge-crossing funds, and the enterprise returns the money to the investor first, and the investor then gives the money to the enterprise. In this case, the purpose of debt-to-equity swap can still be achieved indirectly.
If the investor is a fund with a foreign background, the situation will be more complicated. First of all, if Chinese-funded enterprises in China borrow from abroad, it will constitute borrowing foreign debts. According to the Interim Measures for the Administration of Foreign Debt, the state implements full management of all kinds of foreign debts and contingent foreign debts. The use and repayment of borrowed foreign debts, foreign guarantees and foreign debt funds shall comply with the provisions of relevant state laws, regulations and these Measures. Foreign loans borrowed by domestic institutions are uniformly incorporated into the national foreign debt plate for quota management, and it is difficult for general private enterprises to obtain quotas. Secondly, if foreign investors lend to enterprises in China, it is difficult to enter and settle foreign currency funds. Thirdly, it is impossible to obtain overseas loans indirectly through standby letter of credit loans. According to the Notice of the State Administration of Foreign Exchange on Improving Foreign Debt Management, Chinese-funded enterprises in China may not accept guarantees from overseas institutions or individuals when borrowing loans from domestic financial institutions without the approval of the State Administration of Foreign Exchange. Of course, in practice, there are indeed various flexible methods to achieve the purpose of borrowing overseas funds. For example, small funds enter through the foreign exchange quota of natural persons, but at least from the current law, there is no relatively smooth channel for borrowing overseas funds. Finally, even if you can borrow money, you can't directly convert it into equity. You must rely on the flow of bridge funds to achieve the purpose of converting it into equity.
If it is a foreign-invested enterprise, and the proportion of foreign investors' capital contribution is higher than 2i%, it can borrow foreign shareholders' loans and other overseas loans within the scope of "mortgage difference", but for foreign-invested enterprises with foreign investors' capital contribution less than 25%, borrowing foreign debts shall be handled in accordance with the relevant provisions on borrowing foreign debts by Chinese-funded enterprises in China. The Interim Measures for the Administration of Foreign Debt stipulates: "The state shall control the total amount of foreign debts borrowed by domestic foreign-funded financial institutions, and the sum of the accumulated amount of medium and long-term foreign debts borrowed by foreign-invested enterprises and the balance of short-term foreign debts shall be controlled within the difference between the total project investment approved by the examination and approval department and the registered capital. Within the margin, foreign-invested enterprises can borrow foreign debts on their own. If the difference is exceeded, the total investment of the project must be re-approved by the original examination and approval department. " The registered capital of a foreign-invested company with a foreign debt scale of not less than US$ 30 million, the sum of its short-term foreign debt balance and the accumulated amount of medium-and long-term foreign debt shall not exceed 4 times of the paid-in registered capital; If the registered capital is not less than 10 billion USD, the sum of the short-term foreign debt balance and the accumulated amount of medium-and long-term foreign debt shall not exceed 6 times of the paid-in registered capital. Assets formed by foreign debts borrowed by foreign-invested leasing companies shall be counted as risk assets, and the total risk assets shall not exceed 10 times of their total net assets. The Interim Provisions on Statistical Monitoring of Foreign Debt and the Detailed Rules for the Implementation of Statistical Monitoring of Foreign Debt stipulate that "Chinese-foreign equity joint ventures, Chinese-foreign cooperative ventures and foreign-funded enterprises shall, within 15 days after the loan contract is formally signed, go through the registration formalities at the local foreign exchange administration with a copy of the loan contract and obtain the foreign debt registration certificate registered one by one". If the total amount of investment is changed without the approval of the original examination and approval department, the foreign exchange bureau shall not handle the formalities for examination and approval of the registration and settlement of the remittance of excess foreign debt funds of foreign-invested enterprises. For example, foreign-invested enterprises
If the debt funds have been remitted in excess, they should consciously go to the original examination and approval department for examination and approval of changing the total investment. The foreign exchange bureau allows enterprises to retain foreign debt funds within a three-month period. After this period, the foreign exchange bureau will notify the bank to return the excess funds along the original remittance route in the form of approval documents for foreign exchange business of capital projects. Of course, you can also enter through standby letter of credit loans or bill loans, but it must also be within the scope of "charge difference". Therefore, if the investment target is already a foreign-invested enterprise, investors can invest in the form of loans within the scope of "gambling difference". But in the share conversion, it can't be done directly. It is still necessary to return the loan to the investor first, and then inject the funds into the enterprise as capital contribution. Of course, this can be agreed in advance in the contract. However, generally speaking, convertible bonds are difficult to operate in the legal environment of China.