The Regulatory Issues Research In China Of Contractual Control Mode

Early development of the Internet enterprises in our country, due to the domestic capital market was not perfect enough, companies seek to direct financing and indirect financing channel was narrow, that hindered the development of domestic Internet companies. Economic globalization led to the transnational flow of capital, the line of sight of domestic enterprises began to find financing in the international capital markets. At the same time, foreign investors became aware of the emerging enterprises such as the Internet of our country because of the huge investment potential, eager to get enormous return on investment. But limited by the time background of that time, because of the protection of the national security, the national industry and the market stability, regulators in China set up numerous regulatory barriers in this field.Contractual control mode is between two equal civil subject, through a series of control and capital contracts, such deals will be each other’s interests and rights associated with legal arrangements. In 2003, under the influence of Enron event, US Financial Accounting Standard Board issued FIN46, officially proposed the concept of variable interest entity. Different from two companies should be consolidated according to majority voting, the announcement requires that as long as the entity conform to the standard, the entity loses control of itself, just need to be consolidated. By this revelation, domestic enterprises in our country started the legal framework contractual control mode is constructed to meet their financing needs. In 2000, SINA the first used this model successfully listed on NASDAQ, since then, a large number of enterprises in the same way in China to obtain a large amount of foreign capital injection, provided the development of the domestic enterprise powerful motivation.Chapter 1 expounds the relevant contents of the contractual control mode. Contractual control mode is derived from the variable interest entities, different from equity control, is a kind of foreign investment, which has strong flexibility and great risks. Construction of contractual control mode is designed to get around of regulatory measures in our country, and investment and finance in legal form, to circumvent the existing regulatory system. The legal framework of contractual control mode needs to go through four steps, such as setting up an offshore holding company, setting up a wholly foreign owned enterprise in China, completing the restructuring of operational entities, reaching a deal with operational entities.Chapter 2 expounds the necessity of contractual control mode regulation, organizes the regulatory status of contractual control mode in our country and puts forward the new regulation of PRC Foreign Investment Law(draft version for public comment). The regulatory status of contractual control mode is divided into foreign access review, national security review and antitrust review of three parts. The existing law is heavy and disorderly and the regulator’s ambiguous attitude could not judge, that we need to reshape the contractual control mode legal supervision system. PRC Foreign Investment Law(draft version for public comment) meets the demand. It gives the contractual control mode a legal position, controls the circumvention, sorts out the existing stock.Chapter 3 analyzes the positive results of contractual control mode from PRC Foreign Investment Law(draft version for public comment). PRC Foreign Investment Law(draft version for public comment) changes the regulation attitude, makes a clear differentiation of the regulation object, improves the regulator setting, weakens the beforehand supervision and strengthens the afterwards supervision, perfects the relief of interest subjects. It solves many problems of contractual control mode regulation in our country.Chapter 4 studies the defects of PRC Foreign Investment Law(draft version for public comment), and provides some suggestions. Although the foreign investment law has made positive changes to supervision of the contractual control mode, but it still has some defects of basis making, regulators setting and international cooperation. Firstly, we should perfecting the control standards; secondly, establishing a multi-level supervision system of foreign investment access review, national security review and antitrust review; thirdly, improving the regulatory institutions; finally, strengthening the supervision of cross-border cooperation.