[By Zoe Zhou, Dezan Shira & Associates Guangzhou office]
An increase in capital is usually required by the government when an FIE is intending to expand its business scope. Increasing registered capital is also an important way to finance FIEs.
Registered capital, total investment, foreign debt, FIE financing
Below is a simple formula that may influence the financing of an FIE:
maximum amount of foreign debt ≤ total investment – registered capital
The ratio between the registered capital and the total amount of investment shall conform to the relevant statutory ratio between the registered capital and total investment as showed in the form below.
If an FIE needs to borrow money from overseas (from the mother company or bank for example), the total amount of foreign debts should not exceed the gap between the total investment and the registered capital allowed by law.
In practice, when it is not possible for an FIE to get a bank loan from a Chinese bank, the increase of registered capital is the most straightforward way to gain financing from the mother company. If an FIE will need to seek a loan from abroad, either from the mother company or from a bank abroad, it may be limited by the gap between the registered capital and total investment. If the registered capital is increased, the FIE will be able to enjoy a larger margin to borrow in future.
