C (S) FTZA [2014] No. 26

Chapter I  General Provisions

    Article 1

With a view to encouraging and promoting the sound development of commercial factoring in the China (Shanghai) Pilot Free Trade Zone (hereinafter referred to as the “PFTZ”), further opening up the credit service industry in PFTZ, preventing credit risks, and regulating business activities, these Procedures are formulated in accordance with the Notice of the State Council on Printing and Distributing the Framework Plan for the China (Shanghai) Pilot Free Trade Zone ( SC G[2013] No. 38), the Notice of the Ministry of Commerce on Work Related to the Pilot Commercial Factoring (CC L[2012] No. 419), the Reply of the Ministry of Commerce on the Implementation Plan for the Pilot Commercial Factoring (CC L [2012] N0. 919), the Notice of the General Office of the Ministry of Commerce on Effective Administration of the Commercial Factoring Industry (GOCO L [2013] No. 718), the Procedures for the Administration of the China (Shanghai) Pilot Free Trade Zone, the Procedures for the Administration of Filing Foreign-funded Enterprises in the China (Shanghai) Pilot Free Trade Zone, the Special Administrative Measures (Negative List) for Foreign Investment in the China (Shanghai) Pilot Free Trade Zone (2013), and other relevant laws and regulations.

Article 2

The “commercial factoring” in these Procedures means that a supplier enters into a factoring agreement with a factor, under which the supplier transfers its current or future accounts receivable to the factor to obtain financing, or services such as separate account management, collection of accounts receivable, and bad debt guarantee, from the factor.

    Commercial factoring is factoring services provided by non-bank institutions.

    Article 3

The “enterprises engaging in commercial factoring” in these Procedures mean the Chinese- or foreign-funded commercial factoring enterprises and the Chinese- or foreign-funded financial leasing companies established in PFTZ, the latter concurrently providing commercial factoring services related to their main business. Financial leasing companies engaging in commercial factoring shall comply with the requirements of the competent authority for the financial industry.

    The China (Shanghai) Pilot Free Trade Zone Administration (hereinafter referred to as the “PFTZ Administration”) is the competent authority for the commercial factoring industry in PFTZ.

    Article 4

A commercial factoring enterprise shall meet the following conditions:

1. The investors of the enterprise have experiences in commercial factoring operations or the relevant industries.

2. The investors of the enterprise have assets and financial strength necessary for conducting commercial factoring, have a sound corporate governance structure and adequate and effective internal control rules for risks, and have not received any punishment for non-compliance recently.

    3. In making application for establishment, the enterprise has two or more senior executives with management experience in the financial field and without a bad credit record.

    4. The enterprise is formed as a company. Its registered capital is not less than 50 million yuan and must be in the form of monetary capital.

    5. The enterprise has sound internal control rules, including but not limited to rules for risk assessment and business flow operations and monitoring. And

6. If the enterprise is a financial leasing company which concurrently provides commercial factoring services, it shall comply with the provisions on the establishment of a financial leasing company, in addition to the above conditions.

    Article 5

An enterprise engaging in commercial factoring may provide the following services:

1. import and export factoring;

    2. domestic and offshore factoring;

    3. Consulting services related to commercial factoring; and

    4. Other relevant services licensed.

    A financial leasing company may apply for concurrently providing commercial factoring services related to its main business, i.e. the above services related to leases and lessees.

    Article 6

An enterprise engaging in commercial factoring shall not conduct the following activities:

    1. absorbing deposits;

    2. providing loans for its account or for the account of another party;

    3. engaging in the collection of accounts receivables or debts irrelevant to commercial factoring in a specialized manner or on behalf of another party;

4. making investment on behalf of another party; or

5. other activities prohibited by the State.

Chapter II  Formation and Modification

    Article 7

The establishment or modification of an enterprise engaging in commercial factoring shall be conducted under the following procedure:

1. An application for the establishment of a Chinese-funded factoring company engaging in commercial factoring or an application of an existing Chinese-funded financial leasing company for concurrently providing commercial factoring services related to its main business shall be submitted to the PFTZ Branch of Shanghai Administration for Industry & Commerce, which shall process the registration formalities after consulting with the PFTZ Administration.

    2. An application for the establishment of a foreign-funded factoring company engaging in commercial factoring shall be submitted to the PFTZ Administration, and after a filing certificate is obtained from the PFTZ Administration, the registration formalities shall be completed with the PFTZ Branch of Shanghai Administration for Industry & Commerce.

3. An application of a newly formed or an existing foreign-funded financial leasing company for concurrently providing commercial factoring services related to its main business shall be submitted to the PFTZ Administration, and, after the said Administration issues an approval document, the applicant shall undergo the registration formalities with the administrative department for industry & commerce by virtue of the approval document and approval certificate.

Article 8

For the establishment of an enterprise engaging in commercial factoring, the following materials shall be submitted in addition to the statutory application materials:

    1. risk assessment and monitoring and other risk control rules;

2. documents proving commercial factoring operations or experience in the relevant industries;

3. certificates on the seniority of executives and personnel of the risk control department; and

    4. each investor’s audit report for the last year which has been audited by an accounting firm.

Article 9

Except financial leasing companies which concurrently provide commercial factoring services related to their main business, commercial factoring companies shall include “commercial factoring” in their names.

Chapter III  Management of Funds

    Article 10

Enterprises engaging in commercial factoring may raise funds through legitimate channels such as borrowing from banks, non-bank financial institutions, and their shareholders, issuing bonds, and refactoring. The financing sources must comply with the relevant laws and regulations of the State.

    To prevent risks and ensure safety in operations, an enterprise engaging in commercial factoring shall effectively develop a credit risk management platform, and, generally, the risk assets of the enterprise may not exceed 10 times the total net assets of the enterprise. Risk assets shall be determined according to the total residual assets after deduction of cash, bank deposits, and treasury bonds from the total assets of the enterprise.

    Article 11

An enterprise engaging in commercial factoring must conduct online registration with the Pledged Accounts Receivable Registration Publication System of the Credit Reference Center of the People’s Bank of China, register each account receivable transferred to it with the system in the course of business operations, and obtain an initial registration voucher. In the case of modification or cancellation of registration of any account receivable, a commercial factoring enterprise shall register it with the system in a timely manner, and obtain a registration modification or cancellation voucher.

    Article 12

Enterprises engaging in commercial factoring shall entrust banks in PFTZ which have joined international organizations of factoring enterprises to be their depository banks, and open special accounts for commercial factoring operating funds with such banks. Enterprises engaging in commercial factoring may only use the special accounts for routine commercial factoring operations.

    The extent of and requirements for the use of funds in the special accounts shall be adjusted or supplemented after the relevant reform measures of PFTZ are finalized.

    Article 13

An enterprise engaging in commercial factoring shall enter into a fund management agreement with its depository bank, specifying the rights, obligations, and responsibilities of both parties.

    The enterprise engaging in commercial factoring shall, within five working days after entering into the fund management agreement, file a duplicate of the agreement and the information on its basic account and special account with the PFTZ Administration.

    The depository bank shall file the relevant depository rules with the PFTZ Administration, and manage the fund account of the enterprise engaging in commercial factoring and the use of funds in the account.

    Article 14

Depository banks shall designate personnel responsible for the fund management and payment and settlement of the special accounts of commercial factoring enterprises, data review, and other specific work; and shall maintain account books for the movement of funds of commercial factoring enterprises in the course of financing, disbursement, and repayment, and conduct account reconciliation with commercial factoring enterprises on a regular basis.

Depository banks may charge management fees to commercial factoring enterprises, and the fee rate may be agreed on by a depository bank and a commercial factoring enterprise as long as it does not violate the relevant provisions of the State.

Chapter IV  Operation Supervision and Risk Prevention

    Article 15

An enterprise engaging in commercial factoring must, as legally required, log on the Commercial Factoring Information System of the Ministry of Commerce to enter the required information, including but not limited to information on company registration, qualifications of senior managers, financial standing, operations, and building of internal management rules. A newly registered enterprise shall complete the entry of basic information within 10 working days after establishment; and, thereafter, complete the entry of business information for the prior month and quarter within 15 working days after the end of each month and quarter. Information entry will be used as an important indicator for the compliance evaluation of a commercial factoring company.

    Enterprises engaging in commercial factoring shall effectively report major events. Within five working days after occurrence of any of the following events, an enterprise engaging in commercial factoring shall log on the information system to report it to the competent authority for the industry, and cooperate with the latter in supervisory inspection:

    1. a change of a principal shareholder holding more than 5% of the shares of the enterprise;

    2. a single material affiliated transaction at a value of more than 5% of the net assets of the enterprise;

    3. a single material debt at a value of more than 10% of the net assets of the enterprise;

    4. a single contingent liability at a value of more than 20% of the net assets of the enterprise；

    5. a major loss or compensatory liability at a value of more than 10% of the net assets of the enterprise；

    6. a change of the chairman of the board of directors, the general manager, or any other senior manager of the enterprise；

    7.a capital decrease, a merger, a split, the dissolution, or the filing of an application for bankruptcy of the enterprise; or

    8. a major pending litigation or arbitration.

    Article 16

An enterprise engaging in commercial factoring shall establish an effective corporate governance structure, improve internal control mechanisms, conduct business in compliance with laws and regulations, and effectively prevent risks, so as to operate independently, exercise self-restraint, and assume the sole responsibility for its profit or loss and risks.

Article 17

The accounts receivable transferred to enterprises engaging in commercial factoring must be within the normal payment periods. Generally, the following accounts receivable are nontransferable:

1. void accounts receivable for violation of laws and regulations of the State or for lack of operating right;

    2. accounts receivable involved in ongoing trade disputes;

    3. accounts receivable arising from an agreement on return of unsold merchandise;

    4. accounts receivable in the category of security deposits;

    5. accounts receivable which may be subject to debt offset;

    6. accounts receivable which have been transferred or posted as security;

    7. accounts receivable to which a third party has claimed right of subrogation;

    8. accounts receivable which may not be transferred under laws and regulations or as agreed on by the parties;

9. accounts receivable for which compulsory legal measures have been taken; and

10. accounts receivable with any other possible defects of rights.

    Article 18

Where an enterprise engaging in commercial factoring violates the relevant provisions in business operations, it shall be ordered to make correction; if the cases are serious, the competent authority shall impose a punishment according to the law; and, if the violation constitutes a crime, the violator shall be subject to criminal liability according to law.

    Article 19

The PFTZ Administration shall be responsible for administering and overseeing enterprises engaging in commercial factoring in PFTZ, and conduct on-site and off-site inspections on their rule building, internal control mechanisms, compliance in operations, financing management, and accounts opened, among others, on a regular or unscheduled basis.

    As needed for supervision, the PFTZ Administration has the power to require enterprises to provide specific materials, or hold regulatory interviews with their directors, supervisors, and senior executives, requiring them to provide relevant explanations and address relevant issues.

Depository banks shall oversee the fund operations of enterprises, and, if discovering any violations of laws and regulations of the State or the depository agreements, refuse execution instructions and immediately report to the PFTZ Administration.

Chapter V  Supplementary Provisions

    Article 20

If the State or Shanghai Municipality promulgates any new provisions during the implementation of these Procedures, adjustments shall be made to these Procedures according to such new provisions.

    Article 21

These Procedures comes into effect as of the date of promulgation, effective for two years.