Legal Impediments And Countermeasures On The Exit In Debt-equity Swaps

At the end of 2015,China began to implement deleveraging,which was considered as one of the five priority tasks in the supply-side structural reform,and the debt-equity swaps was an important measure in it.According to the “Market Survey Report on China's Financial Non-Performance Loans in 2017” issued by China Orient Asset Management Company,there were 56 signed projects with RMB 709.5 billion in Sep.2016 to Jun.2017.However,only 10 projects of them with RMB 73.45 billion were put into effect,accounting for about 10 % of the total signed amount.The most important reason for slow progress in debt-equity swaps is the difficulty in the exit in debt-equity swaps,which is reflected in three aspects: less options to withdraw,long withdrawal period and much administrative interventions by the government,while the cause is that there are many legal impediments in market-oriented exit.Solving these impediments properly will accelerate the completion of deleveraging task and promote the overall process of the supply-side structural reform ultimately.Since the first implementation of debt-equity swaps in the late 1990 s,there have been legal impediments at both macro level and micro level in their exit procedures.The macro impediments are the lack of legal system,which was replaced by policies,and the conflict between banks' shareholding behaviors and the Law of PRC on Commercial Banks.While the micro impediments appear in the implementations of each exit method.In the case of equity repurchase,there are five problems: conflicts between this method and the regulation on restricting the repurchase of company's shares,creditors' rights in company's capital reduction procedures,conflict between signing debt-equity swaps contracts and procedures of shareholder's resolutions,conflict in the identification of legal relation when equity are in the nature of debt,and conflict between performancing the debt-equity swaps contracts and breaking them.While in the case of external transfer,there are two major issues: the equity transfer regulations of limited liability companies and the mandatory tender offer regulations of listed companies restrict transfers.And in the case of listing in public market,regulations on the circulation of shares restrict the exit.Even though the State Council broke through the limitations of the Law of PRC on Commercial Banks on debt-equity swaps by special policies in Sep.2016,solving the above legal impediments still needs a systematic way.In solving the macro impediments,it is of vital importance to perfect the legal system of debt-equity swaps,enact supporting administrative regulations and departmental rules to make legislations replace the policies,and amend provisions of exception and time limits on banks' shareholding behaviors in the Law of PRC on Commercial Banks.And in solving the micro impediments,it is needed to strengthen the supervisions on the equity repurchase first,which should be specified in five ways: the capital reduction obligation after repurchasing,adding a new obligation of the debt-equity company to launch mandatory offers and a new “debt-equity” option to qualified creditors,specifying the resolution procedure of repurchase contracts,prohibiting the operation of equity in the nature of debt,determining the calculation mode of default.As to the cases of external transfer and listing in public market then,it is necessary to maintain the current supervision mode in order to ensure the healthy development of capital market and achieve other priority tasks in the supply-side structural reform.In addition,it should also settle two problems deeply: specifying the principle of marketization and reduce excessive administrative interventions by the government;and exploring for new exit modes,including making certain rights in equity of debt-equity swaps prior and posterior,adding performance promising clause and guarantee clause,creating industrial funds and MBO modes in exit.