Capital Contribution in the Form of Equity
For company incorporation, capital contribution in the form of currency (cash) is the most common way for shareholders to contribute their subscribed registered capital. For cash contribution, the shareholders must remit the cash funds to the bank account of the company from their bank account. Besides cash contribution, the shareholders can make capital contribution in kind, intellectual property right or other non-monetary properties as well.
The legal basis for capital contribution in the form of equity is Article 48 of the Company Law of the PRC. According to the provision of this article, a shareholder can use equity held in another company to make capital contribution.
The following conditions shall be satisfied when capital contribution is made in the form of equity:
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The equity used for capital contribution shall be held by the investor lawfully.
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The equity used for capital contribution shall be transferable pursuant to the law.
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The equity used for capital contribution shall be free from defects and encumbrances. For example, the equity used for capital contribution has not been frozen or pledged.
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The equity used for capital contribution has been appraised and valued by a qualified asset appraisal institution.
When a shareholder use equity held in another company to invest and establish a company, the equity used for capital contribution must be transferred to the newly established company and be registered under the name of the newly established company accordingly. For example, if A holds 50% equity of Company B, then A can use its 50% equity of Company B to invest and establish Company C. After the equity contribution is completed, A is no longer a shareholder of Company B, Company C becomes a shareholder of Company B, and A becomes a shareholder of Company C.
It shall not be deemed that the shareholder has fully fulfilled its capital contribution obligation if it fails to follow the legal procedures for equity transfer and register the equity used for capital contribution under the name of the new company through the company registration authority.
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