Examining market-oriented debt-for-equity swaps

The State Council issued the Opinions on Actively and Steadily Reducing the Leverage Ratio of Enterprises on 10 October, which put forward seven main ways to reduce the leverage ratio of enterprises, including actively promoting corporate mergers and acquisitions, implementing market-oriented debt-for-equity swaps for banks in an orderly manner, etc. The State Council simultaneously issued the Guiding Opinions on Market-oriented Debt-for-Equity Swaps for Banks to further clarify the mode of implementation for debt-for-equity swaps, which marked the official launch of a new round of swaps.

THE LEGAL BASIS

Debt and equity are the two major ways of obtaining the external funds to realize the financing for enterprises. The two ways are complementary to each other as there are significant differences in their financing risk, financing cost, influence on corporate governance, etc. Enterprises may select either of the above financing methods or both, based on their development and specific circumstances.

Respecting the freedom of contract is the basic principle of civil and commercial laws. The debt and equity can be swapped for each other as long as it is the free will of the parties to the transaction and meets the constituent elements of the equity or debt, and does not violate the provisions of mandatory laws and regulations.

Jiang Fengtao is the managing partner and Liu Bing is a partner at Hengdu Law Firm