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IDENTIFYING PAPER TIGERS: WHAT SUBSCRIBED CAPITAL LISTED ON THE BUSINESS LICENSE REALLY MEANS


2 March 2020 | Tags: Risk, Fraud, Registered capital | Written by Dr. Richard van Ostende | Reading time: 4 minutes


INTRODUCTION

The vast majority of companies located in China are legitimately established, doing business and seeking to develop their business operations in an honest way, compliant with domestic and international laws, regulations and ethical standards. Unfortunately, there are always a few that aren’t.

In this article we will discuss the scam of the increased subscribed capital, which has the purpose to appear to be heavier invested and herewith more financially stable and capable as well as how the scam can be recognized.


WHAT SUBSCRIBED CAPITAL MEANS

Prior to March 2014 China operated a paid-up capital registration system. Absolute minimum capital requirements per type of (Foreign Invested) Enterprise had been defined by law and regulations, but in practice the actual capital requirements to be paid up by investors varied per geographical region and industry in China.

Per March 2014, in general the minimum mandatory capital requirements was abolished and the paid-up capital registration system was replaced with a subscribed capital registration system. Exceptions to a number of industries remain. This subscribed capital system allows new to be established companies to complete their business registration process without having to inject full capital contributions directly upon incorporation. Instead the system offers more flexibility by allowing the capital to be paid up in phases in accordance with expected liquidity needs.

Bottomline, the subscribed capital listed on the business license indicates for how much capital the investors are committed to invest in the company.


WHAT SUBSCRIBED CAPITAL DOES NOT MEAN

The amount subscribed capital listed on the business license does not necessarily equal the sum of investment made:

  • Under current regulations investors are not required to pay in a (minimum level of) capital when the company is established, but have the possibility to pay capital into the company based on the company’s actual liquidity requirements. Effectively investors have the possibility to pay-in capital over time when the investor deems suit.

  • In the event that the subscribed capital would have been invested in full, there is no guarantee that the capital still is present in the company. Business activities result in cash in and outflows which affect the capital position.

Bottomline, the subscribed capital does not equal cash at hand or bank.


HOW TO PROTECT YOURSELF

There are a number of basic steps organizations can implement to protect themselves self against the “increased subscribed capital” scam:

  • Does the level of subscribed capital make sense? As a rule of thumb, trading and consulting companies require generally relatively little investment, and less investment compared to a manufacturing company due to its investment in machinery and overheads required to produce. The level of subscribed capital provides a first indication on whether the contact partner is a manufacturer or a trading company. Doing business with a trading company instead of a manufacturing company implies that the trading company will reduce (profit) margin. How to distinguish a trading company and a manufacturer based on the business license is discussed in the following article here.

  • Verification. The subscribed capital can be verified utilizing the China National Enterprise Credit Information System (NECIS) database or at the bureau of the Administration of Industry and Commerce (AIC) which governs the company.

Any inconsistencies that arise out of the assessment are to be clarified. If you have a feeling something might be incorrect, such as a slight deviation in beneficiary name, the way you have received the request, by whom you have received the request, if there is sudden urgency, do not doubt your doubts and clarify the matter first.


The information in this article is intended for general information on the subject matter. The content of this article is not intended to replace professional advice on the subject matter in relation to your specific circumstances.

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Copyright © 2020 R.A. van Ostende. All rights reserved.