How to choose the appropriate capital pool model for financial companies or settlement centers?

The capital pool, also known as the cash pool, was first developed by the finance companies of multinational companies and international banks to allocate the group's global funds in a unified manner and minimize the net position held by the group. With the continuous development of the mainland economy, in order to scientifically and reasonably realize the centralized control and overall allocation of the funds of the group enterprises, the group enterprises at all levels in the mainland have established a "capital pool" within the group, so as to help the group enterprises complete the centralized management of funds to the greatest extent, revitalize financial resources, and reduce financing costs and capital use costs. At the same time, in 2022, the State-owned Assets Supervision and Administration Commission issued a notice on promoting the construction of the treasury system of central enterprises to further strengthen the management of funds, requiring central enterprises to strengthen the centralized management of group funds, and to use financial companies and capital centers as centralized management platforms for funds, and establish cross-account, cross-unit, cross-level and cross-regional "capital pools".

As an efficient management tool, there are two main modes of operation of the capital pool: one is the financial company model, and the other is the fund settlement center model. What are the characteristics of these two models? How can group enterprises choose the appropriate capital pool operation mode according to their own capital management needs? This paper will discuss these two models, analyze the advantages and disadvantages of these two models in depth, and put forward several factors that need to be considered in constructing the capital pool management model, so as to provide scientific and effective advice strategies for group enterprises to choose the appropriate capital pool management model.

1. Introduction to the settlement center model and the financial company model

●Settlement center mode

The fund settlement center is generally a fund management institution set up within the enterprise group for internal and external settlement in order to solve the situation that there are many subordinate units of the subsidiary, each unit has set up bank accounts separately, and the funds are not concentrated.

The capital pool of the settlement center model is generally set up in the parent company of the group, which belongs to the financial department, and uses online banking to manage the capital pool, and the group will generally sign a "capital pool" business agreement with the bank, and the subordinate companies included in the management of the group must open an account in the designated bank and settle the interest in the form of two lines of income and expenditure. The pool account will pay interest on deposits to the member companies that transfer the funds and collect interest from the member companies that use the funds. At the same time, the pooled account will also charge interest on bank deposits, so the income of the cash pool depends on the deposit and loan spreads and the interest income of bank deposits.

● Financial company model

A finance company is a non-bank financial institution established by an enterprise group to strengthen capital management, usually operating as an independent legal entity affiliated with the group enterprise, and is mainly responsible for handling the internal and external financing business of the group. When conducting business activities, financial companies are not only subject to internal supervision but also supervision by the People's Bank of China. It has the dual nature of enterprise characteristics and financial institution attributes.

The specific operation of the financial company is similar to that of the settlement center model, but the operation form is more flexible, and the financial company can adopt a similar approach to commercial banks. The finance company collects funds to the maximum extent by centrally managing the accounts of member units. The member unit deposits the idle funds into the finance company, and the finance company calculates the interest and pays it to the subordinate units according to the deposit time of the member unit. If the existing stock of funds is insufficient to meet the capital demand, it can apply for a loan to the financial company, and the financial company will approve the loan application and issue the loan funds according to the credit status of the member unit and the allocated loanable amount, and collect interest at the same time. In addition, since the finance company has the qualification of a financial institution, the finance company can invest and finance in the primary market, make interbank lending to banks or use idle funds within the group to invest, so as to realize the secondary financing of funds and obtain capital appreciation. As a result, the income component of the finance company is more than the part of the investment income in the capital market compared to the settlement center model.

2. Comparative analysis of the settlement center model and the financial company model

• Financial company model

Under the financial company model, the group collects the scattered funds of the member enterprises into the financial company of the group enterprise for management through the establishment of a financial company, and the advantages of adopting this model are:

• Finance companies have independent legal personality and have greater autonomy and decision-making power, and are able to make decisions and manage risks independently
• In addition to basic settlement business, finance companies can also provide credit, investment and other services to meet the diversified financial needs of enterprises
• In some countries and regions, finance companies may enjoy specific tax incentives to reduce the tax burden of enterprises
• Finance companies can attract and cultivate professional financial talents and provide more professional financial services

However, there are certain limitations to setting up a finance company:

• The threshold for the establishment of a financial company is relatively high, and it needs to meet certain capital and qualification requirements, and it needs to be approved by the relevant regulatory authorities
• Finance companies are strictly supervised by financial regulators, and the cost of compliance is high
• As a subsidiary of the group, the finance company cannot interfere in the operation and management of other members of the group, and it is difficult for the finance company to play the function of capital control

This model is mainly suitable for multinational enterprises with high total asset value and relatively mature development.

• Settlement center model

Under the settlement center model, the group uses the capital management system to build a capital pool through the fund settlement center, and can realize the construction of the enterprise capital pool without relying on the capital pool model of a specific bank, and the advantages of adopting this model are:

• The establishment of a financial company needs to meet many conditions and the procedures are more complicated, while the fund settlement center, as a functional department of the enterprise, has low establishment costs and simple procedures, and the internal operation process is relatively simple
• As a functional department of the group, the fund settlement center does not need to be supervised by financial regulators, and is more flexible in operation, with low operating costs and compliance costs
• As an internal functional department, the fund settlement center can supervise and control the fund settlement of member units, and cooperate more closely with member units

However, there are some limitations to adopting this model:

• The function is relatively simple, mainly focused on settlement and fund allocation, and does not have the qualifications of financial institutions, so it cannot meet the diversified financial needs of enterprises
• Since the settlement center is only a functional department within the group, it cannot independently carry out decision-making and risk management, which may lead to reduced decision-making efficiency

This model is mainly suitable for fast-growing medium-sized enterprises and group enterprises with extensive branches.

3. How does the group choose a capital pool model that adapts to its own business?

When choosing the capital pool model, the group enterprise should comprehensively consider its own business situation, capital management needs and other factors, and choose the capital pool model that is most suitable for its own business development needs, mainly focusing on the following points:

●Scale and complexity of the business

For large group enterprises, the group business is more complex and diverse, often requiring more abundant financial services, and the financial company, with its strong financial functions and independent legal personality, can better cope with complex financial needs and market changes. For small and medium-sized group enterprises with smaller scale and simpler business, the fund settlement center can reduce costs and simplify the process, and the settlement center model may be more in line with their actual needs.

●Liquidity requirements

For enterprises with high liquidity requirements, the simpler internal operation process of the settlement center can improve the efficiency of fund allocation and aggregation. If the enterprise pays more attention to the planning and investment of long-term funds, the financial company is more suitable.

● Risk management needs

Finance companies are able to independently conduct risk assessment and management, and provide more professional risk management services. However, due to its internal nature, the settlement center may be more conservative in terms of risk control, and pay more attention to preventing and controlling internal risks.

● Tax considerations

Comprehensive consideration and analysis of tax aspects is also one of the important factors in choosing a capital pooling model, and if a company needs to manage funds on a global scale, it should consider the impact of local tax policies on both models.

●Compliance & Regulation

Regulatory requirements for finance companies and settlement centers vary from region to region around the world. Companies need to fully understand and assess local compliance and regulatory requirements, and should fully consider compliance and regulatory factors when making their choices. For regions with stricter regulatory requirements, it may be more advantageous to choose a finance company, as it is more professionally regulated and regulated.

●Corporate culture

The group's corporate culture will also influence the choice of model, if the enterprise values internal communication and collaboration, the settlement center model is more beneficial, and if the enterprise is more focused on independent operation and rapid decision-making, the independence of the financial company is more suitable for the needs of the enterprise.

bibliography

[1] Yang Jie. Comparative Analysis of Capital Management Models of Enterprise Groups[J]. CPA, 2022, (19): 36-38.

[2] Wan Ying. Research on the application of capital pool management mode of Y group company[D]. Xi'an Shiyou University, 2019.

[3] Liang Xuebing. Research on the construction of intelligent management system of group treasury[D]. Shanxi University of Finance and Economics, 2023.

Author: CUHK Consulting

Source: CUHK Consulting

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