Capital is an indispensable key element of project financing and has attracted everyone's attention. Credit Vernacular has published articles such as "[The Most Complete in History] Document Regulations on Project Capital" and ""Capital Loan" Accurately Leverages Effective Investment", and now revises the article "Clarifying Capital" according to the latest situation to respond to everyone's concerns.
We will use 13 questions to explain the project capital for you simply and clearly.
1. What is capital?
Guo Fa [1996] No. 35 stipulates that "the capital of an investment project refers to the amount of capital subscribed by the investor in the total investment of the investment project, which is a non-debt fund for the investment project, and the project legal person shall not bear any interest and debt on this part of the fund." ”
Guo Fa [2019] No. 26 reiterates this requirement: the capital of an investment project, as the amount of capital subscribed by the investor in the total investment of the project, must be a non-debt fund for the investment project, and the project legal person shall not bear any debts and interest on this part of the funds; Investors may enjoy the ownership rights and interests in accordance with the law according to the proportion of their capital contributions, and may also transfer their capital contributions, but they shall not be withdrawn in any way. **Unless otherwise specified.
2. What is the proportion of project capital in different industries?
As early as 1996, in the No. 35 document of the State Council, the proportion of capital in the total investment was formulated according to different projects, because in the following years, the first document was issued many times to adjust the proportion, in order to be clearer, we sorted out the following according to the time and year of the proportion adjustment**:
*The last column, from the 2019 Notice on Strengthening the Management of Capital Funds for Fixed Asset Investment Projects (Guo Fa [2019] No. 26), is the latest requirement. As long as you remember that the vast majority of projects are 20%, airport projects are 25%, some infrastructure projects that make up for shortcomings can be reduced by 5 percentage points, and others can be roughly glanced at.
*The figures in this section are the minimum percentage of project capital. Depending on the risk of the project, the lending bank may also require an increase in the capital ratio of the project.
3. Four concepts of project capital in practice:
1. The registered capital of the project company.
2. **The minimum capital ratio requirements of the project proposed in the approval of the feasibility study report.
3. The conditions for agreeing to the loan proposed by the bank: the requirement for the minimum capital ratio of the project.
4. The funds lent by shareholders to the project company can be used to meet the minimum capital ratio requirements if the shareholders promise to repay the debts of the project company or at least inferior to the bank loans.
The data in the above table is the minimum capital ratio requirement formulated at the height of macroeconomic control, and it is also the minimum capital ratio requirement for the approval of feasibility studies and bank approval loans at all levels, however, specific to each specific fixed asset project, the capital ratio approved by the bank may be higher than the above ratio, and the loan conditions of the bank may be higher than the proportion of the bank approval.
For example, if a fixed asset project has a total investment of 1 billion yuan, if the capital ratio is not less than 30%, that is, 300 million yuan, but the bank believes that the project is risky, and requires the project capital ratio to be increased to at least 40%, that is, 400 million yuan is required. In the end, in practice, the project has its own funds of 400 million yuan, of which 100 million yuan is included in the registered capital of the project company, and another 200 million yuan is included in the capital reserve; Another RMB100 million is a shareholder loan obtained by the project company, and the shareholders have promised that the shareholder loan will not be repaid until the project company's debt to the bank is not repaid, that is, the repayment of the bank loan will take precedence over the shareholder loan.
The above examples are set up to illustrate the concept. In practice, it is also possible that the registered capital, the amount of approval, and the amount required by the bank are the same. However, the amount of capital required by the bank cannot be less than the approved amount. Some banks also require that the project company's own funds excluding the part of shareholder loans shall not be less than the approved amount.
4. What is the scope of application of the capital system?
The capital is applicable to the fixed asset projects invested by the enterprise and the operating fixed asset projects invested by the enterprise.
1) According to Guo Fa [1996] No. 35, operational investment projects, including capital construction, technological transformation, real estate development projects and collective investment projects of state-owned units. The operational investment projects of individual and private enterprises shall be implemented by reference. Public welfare investment projects do not implement a capital system. Foreign investment projects shall be implemented in accordance with relevant laws and regulations.
Guo Fa [2019] No. 26 stipulates: "This system is applicable to enterprise investment projects and business projects invested in China. From this article, it can be seen that all projects invested by enterprises, and operational projects invested by enterprises, are subject to the project capital system; However, the non-operating projects (pure public welfare projects) invested in ** may not be applicable to the project capital system (it is not required that it shall not be implemented in accordance with the project capital system).
Most of the non-operating projects invested in China are direct investment, and all the construction funds of the project are arranged through the general public budget or local general bonds, and there is no problem of project capital for such projects. Of course, if the non-operating project of ** investment is carried out through a certain model and carries out market-oriented financing, it should be implemented in accordance with the project capital system.
2) Relevant provisions on fixed asset projects:
Decree No. 2 of 2009 of the China Banking Regulatory Commission "Interim Measures for the Administration of Fixed Asset Loans" "Article 3 The term "fixed asset loans" in these Measures refers to the domestic and foreign currency loans issued by the lender to the enterprise (institution) legal person or other organizations that can be used as borrowers by the state for the borrower's fixed asset investment. ”
The definition of project financing in the "Project Financing Business Guidelines" [2009] No. 71 of the Yin Jian Fa [2009] "Article 3 The term "project financing" in these guidelines refers to loans that meet the following characteristics:
1. The purpose of the loan is usually for the construction of a large production unit or a group of large-scale production plants, infrastructure, real estate projects or other projects, including the refinancing of projects under construction or already built;
2. The borrower is usually an enterprise or institution legal person specially established for the purpose of constructing, operating or financing the project, including existing enterprises and institutions mainly engaged in the construction, operation or financing of the project;
3. The repayment funds mainly rely on the sales revenue, subsidy income or other income generated by the project, and generally do not have other repayment**.
5. The most complete policy provisions on the capital system
6. How to understand the non-debt nature of capital? (1) Whether it is non-debt funds is a key indicator to judge whether the capital is compliant.
Guo Fa [2019] Document No. 26 pointed out that "the capital of the investment project, as the amount of capital subscribed by the investor in the total investment of the project, must be non-debt funds for the investment project, and the project legal person shall not bear any debts and interest on this part of the funds".
It can be seen that whether it is a non-debt fund is a key indicator to judge whether the capital is compliant.
What is non-debt funding?
At present, there are two main understandings of non-debt funds in the practice community and the audit department:
The first type: the debt funds of the project legal person shall not be used as the project capital.
Second, the investor's debt funds shall not be used as project capital.
We believe that, according to the original intent of the policy, it should be understood in the first way, that is, the project capital shall not be the debt funds of the project legal person, and the project legal person has no obligation to repay the principal and interest on this part of the funds.
So, can the debt funds of shareholders be used as the capital of the project?
2) Whether the debt funds of shareholders can be used as project capital.
1. Under normal circumstances, the debt funds of shareholders can be used as project capital.
In practice, shareholders' funds** may be multi-channel. Some are the registered capital paid by shareholders, and some are business income such as project funds and sales funds; If the investor's rating is high, the funds** may also be the funds raised by issuing corporate bonds, enterprise bonds, short-term financing bonds, medium-term notes, and PPN in the capital market with the investor's own credit. Due to the frequent inflow and outflow of funds in the company's account, these funds are often mixed, and it is almost impossible to distinguish which funds are registered capital, which are debt funds, and which are project sales proceeds.
The debt repayment liability of the shareholders is the shareholder's, and the project company has no debt repayment liability for the debt funds of the shareholders.
2. There are restrictions on the debt funds of shareholders.
Shareholders can only borrow debts with their own credit for project capital, and are not allowed to use project cash flow (franchise rights, future accounts receivable) as pledge to borrow debts from financial institutions as project capital.
The reason is that the project company has no obligation to repay the principal and interest of the project capital invested by the shareholders. If the project cash flow is pledged, the project legal person actually bears the guarantee obligation for this part of the funds, which is contrary to the spirit of the project capital system and affects the project company's ability to repay its own debts.
The project company has the obligation to repay its own debts, and the cash flow should be prioritized to ensure the repayment of the project loan, and the financial institution should not and is not allowed to use it to repay the loan to shareholders before the project loan is repaid.
3. State-owned enterprises and PPP projects cannot use shareholder loans (debt funds) as project capital.
Cai Jin [2018] No. 23 document stipulates that when state-owned financial enterprises provide financing to state-owned enterprises (including local ** financing platform companies) or PPP projects participating in local construction, they shall strengthen the capital review in accordance with the "penetration principle" to ensure that the capital of the financing entity is legal and compliant, and the financing project meets the specified capital ratio requirements. If it is found that there are debt funds such as "real debts with famous stocks", shareholder loans, loan funds, etc., and illegal or false capital contributions in the form of public welfare assets, reserve land, etc., state-owned financial enterprises shall not provide financing to them.
This document remains in force after the PPP New Mechanism Circular 115 and has not been repealed.
7. How to account for and manage the project capital? What can be used as project capital?
Guo Fa [2019] No. 26 stipulates that the accounting and management of capital of investment projects shall be implemented by category: "For investment projects that have established independent legal persons, all of their owner's equity can be used as capital for investment projects. For investment projects that have not established an independent legal person, the project unit shall set up a special account, standardize the setting and use of accounting subjects, and conduct independent accounting of the allocated funds and the assets and liabilities of the investment project in accordance with the relevant financial systems and accounting systems of the state, and approve the amount and proportion of the capital of the investment project accordingly. This provision clarifies two issues:
1) If an independent project legal person is established, its owner's equity can be used as project capital.
Financially speaking, the owner's equity of a company mainly includes registered capital, capital reserve, surplus reserve and undistributed profits. Surplus reserve and undistributed profit are the retained earnings of the company's operations and are not applicable to the project capital. Therefore, the registered capital and capital reserve are mainly applicable to the project capital.
In practice, there are three types of financial instruments, namely preferred shares, perpetual bonds and convertible bonds, which can be (partially) included in the owner's equity account under the premise of meeting certain conditions. For example, the Ministry of Finance's 2014 Regulations on the Distinction between Financial Liabilities and Equity Instruments and Related Accounting Treatment stipulates that the issuer should add "4401 other equity instruments" between the "paid-in capital" item and the "capital reserve" item in the balance sheet, and add two additional accounts of "preferred shares" and "perpetual bonds" under the "other equity instruments" item.
Guo Fa [2019] No. 26 also stipulates that "for the infrastructure sector and industries encouraged by the state, project legal persons and project investors are encouraged to raise capital for investment projects through multiple channels through the issuance of equity-based and equity-based financial instruments, but shall not exceed 50% of the total capital." ”
That is, in the case of the establishment of an independent project legal person, the five main types that can be identified as project capital are registered capital, capital reserve, preferred shares, perpetual bonds and convertible bonds, but shall not exceed 50% of the total capital.
At the same time, Circular No. 26 stipulates three circumstances under which it may not be recognized as project capital, namely:
1) There are additional conditions for income such as principal and interest repurchase commitments and back-up guarantees;
2) Before the repayment of the current debt funds, dividends or income can be obtained;
3) In the event of liquidation, the order of repayment takes precedence over other debt funds.
2) If no independent project legal person is established, a special account shall be set up, and the assets and liabilities shall be accounted for independently.
Since there is no legal person for the project, the project funds (including project capital and debt funds) are usually mixed with the investor's own funds, making it difficult to distinguish whether the project capital ratio is compliant. Therefore, Guo Fa [2019] No. 26 has made clear and unambiguous requirements for this situation, requiring the establishment of a special account and independent accounting of assets and liabilities, so as to verify whether the proportion of project capital complies with relevant national regulations.
8. How to calculate the amount of capital investment?
The total investment in the calculation of the capital base is the sum of the asset investment and the underlying liquidity of the investment project, and the specific approval is based on the approved dynamic budget estimates. According to Guo Fa [1996] No. 35 document, the project working capital is part of the total investment of the project, which is generally 30 of the total working capital, and there are two ways to calculate the project capital
Project capital = (fixed asset investment + underlying liquidity) capital ratio.
Project capital = fixed asset investment capital ratio + working capital.
The calculation results of the two methods are very different, and the bottom liquidity and project capital are not exactly the same, the bottom of the working capital must be owned by the shareholders, the project capital can be the debt funds of the shareholders, the bottom of the working capital in the project start-up stage or the initial operation stage will be put into use, will not be idle, and the capital is generally not allowed to be withdrawn. The internal management systems of major banks prohibit the issuance of loans to the working capital of the underground.
9. What are the funds of the project capital**?
1) The capital of the investment project may be contributed in monetary terms, or in kind, industrial property rights, non-patented technology, and land use rights. The physical objects, industrial property rights, non-patented technologies, and land use rights used as capital must be evaluated by a qualified asset appraisal agency in accordance with laws and regulations, and shall not exceed 20% of the total capital of the investment project, unless the state has special provisions on the use of high-tech achievements.
The capital of the investment project is subscribed at one time, and it will be paid in proportion to the approved construction progress year by year.
2) The capital subscribed by the investor in monetary terms, and its funds are:
1. The financial budget funds of the people at all levels, the subsidy funds from the higher levels, the special construction approved by the state, the principal and interest of the "appropriation and loan" and the operational capital construction, the income from land leasing, the income from the transfer of property rights of state-owned enterprises, the various fees collected by the local people in accordance with the relevant provisions of the state and other extra-budgetary funds;
2. The ownership rights and interests of investment institutions and enterprise legal persons authorized by the state (including capital, capital reserve, surplus reserve fund and undistributed profits, listing income funds, etc.) and the funds raised by investors from the capital market in accordance with national regulations;
3. Funds legally owned by individuals in society;
4. Other funds stipulated by the state that can be used as capital for investment projects. For example, Guo Fa [2019] No. 26 stipulates that "for the infrastructure sector and industries encouraged by the state, project legal persons and project investors are encouraged to raise investment project capital through multiple channels through the issuance of equity-based and equity-based financial instruments." ”
5.Project loan funds, shareholder loans that do not comply with national regulations, "famous stocks and real debts" and other funds shall not be used as capital funds for investment projects. To raise capital for investment projects, it is not allowed to increase local hidden debts in violation of regulations, and it is not allowed to violate the relevant requirements of the state on the asset-liability ratio of state-owned enterprises.
10. Special bonds shall be used as project capital
1) In 2019, the Communist Party of China issued the Notice on Doing a Good Job in the Issuance of Local Special Bonds and Supporting Financing of Projects (Ting Zi [2019] No. 33), which allowed special bonds to be used as capital for eligible major projects. The issuance of Circular No. 33 has opened a breakthrough for the fact that project capital cannot be debt funds.
2) Two other points to note:
1. Special bonds can be used as project capital but not all of them as project capital, generally not exceeding 60% of the total investment. Special bonds are the most issued bonds, which means that only investment projects can do so, and enterprise projects cannot.
2. It must be a major project that meets the requirements. For example, railways, national highways, and local highways, power supply, and gas supply projects supported by the state to promote major national strategies.
11. Requirements for the capital of PPP projects
In 2019, the Ministry of Finance's Implementation Opinions on Promoting the Standardized Development of ** and Social-Capital Partnerships (Cai Jin [2019] No. 10) stipulates that shareholders of the project company shall pay their capital in full and on time with their own funds. (This document is a document that remains in force after Circular No. 115 of the Ministry of Finance).
Circular No. 10 requires that "if debt funds are used as project capital, and the capital contribution is false or false, rectification shall be carried out within the time limit." If it cannot be rectified or the rectification is not in place within the time limit, the items that have been put into storage shall be cleared, and if it involves the increase of local hidden debts, the relevant departments shall be requested to be held accountable and properly disposed of in accordance with laws and regulations. This means that if shareholders invest in PPP projects that are not their own funds, they may be identified as debt funds and face penalties such as rectification, withdrawal or accountability.
Since PPPs are carried out in the form of franchises after Circular 115, it means that the capital of franchise projects must also meet the above requirements.
Ten.
2. Policy-based and developmental financial instruments shall be used as project capital.
1) On June 29, 2022, *** presided over an executive meeting, at which it was decided to establish a national infrastructure investment**. Use policy-based and developmental financial instruments to raise 300 billion yuan through the issuance of financial bonds, etc., to supplement the capital of major projects, including new infrastructure, but not more than 50% of the total capital, or to bridge the capital of special bond projects.
2) About the application quota. In principle, the declaration ratio shall not exceed 50% of the minimum capital ratio of the project stipulated by the state, that is, the minimum project capital ratio shall be 20% of the total investment, and the amount of infrastructure investment ** used as capital shall not exceed half of the 20%, and in practice, it is generally applied for according to 10% of the total investment of the project (for example: the total investment of the project is 1 billion yuan, only 100 million yuan of infrastructure investment** can be applied for as capital), and at the same time, the remaining 10%, the investor's own capital contribution shall not be less than 5% of the total investment.
Ten.
3. Management of capital funds for investment projects.
1) Project initiation stage management.
In the feasibility study report, the investment project should make a detailed description of the capital raising, including the investor, the method of capital contribution, the amount of capital** and the amount of capital subscription, and the progress of capital subscription. When submitting the feasibility study report, it must be accompanied by the documents of the commitment of each investor to make capital contributions, and if the capital contribution is made in kind, industrial property rights, non-patented technology, and land use rights, it must also be accompanied by relevant materials such as asset appraisal certificates. (Guo Fa [1996] No. 35).
* For investment projects, the relevant departments shall review the compliance of the capital raising method of the investment project and the relevant capital certification documents when examining and approving the feasibility study report, and confirm the capital ratio and financing method of the investment project in the approval documents; For enterprise investment projects, the relevant financial institutions that provide financing services should strengthen the examination and supervision of the capital of the investment projects, the proportion, and the situation in place. (Guo Fa [2019] No. 26).
2) Adjustment of capital of investment projects.
The actual dynamic budget estimate exceeds the original standard dynamic budget estimate, and the capital of the investment project shall be adjusted accordingly on the basis of the approved adjusted budget estimate to determine the capital that each investor should increase. The actual dynamic budget estimate exceeds the original approved dynamic budget estimate by 10%, and the budget estimate adjustment must be submitted to the original budget estimate examination and approval unit for approval. (Guo Fa [1996] No. 35).
3) Deposit and use of capital funds for investment projects.
For investment projects that mainly use commercial bank loans, investors should deposit the capital into their main lending banks in the amount that should be paid in each year; For investment projects that mainly use CDB loans, the capital should be deposited in a bank designated by CDB. The capital of the investment project can only be used for the construction of the project, and shall not be diverted for other purposes, let alone withdrawn. (Guo Fa [1996] No. 35).
4) Accounting and management of capital funds for investment projects.
Classified implementation: For investment projects with independent legal persons, the owner's equity can be used as the capital of the investment project. For investment projects that have not established an independent legal person, the project unit shall set up a special account, standardize the setting and use of accounting subjects, and conduct independent accounting of the funds allocated and the assets and liabilities of the investment project in accordance with the relevant financial systems and accounting systems of the state, and approve the amount and proportion of the capital of the investment project accordingly. (Guo Fa [2019] No. 26).