On December 26, 2017, China's National Development and Reform Commission (NDRC) published the Administrative Measures for Outbound Investment by Enterprises ("Order No. 11" or the "New Rules"). This is the Chinese government's latest approach to optimize its outbound direct investment ("ODI") regulatory regime since the issuance of the Opinions on Further Guiding and Regulating Outbound Investment (see our earlier bulletin "China's Outbound Investment Regulation Update") in August 2017.
Main Provisions
The New Rules shall be implemented on March 1, 2018. The existing Administrative Measures for Approval and Record filing of Outbound Investment Projects ("Order No. 9"), which was issued in May 2014, shall be repealed simultaneously. Compared with Order No. 9, the New Rules provide several key changes.
- Abolish the "project information report" regime
Under Order No. 9, Chinese companies who invest USD $300 million or more in any outbound M&A or bidding project, shall submit a project information report to, and obtain a confirmation letter (also known as the "Road Pass") from, the NDRC before conducting any substantive work abroad (i.e., entering into a binding agreement, submitting a binding offer or filing an application with the regulators in the host jurisdiction).
The New Rules repeal the "Road Pass" requirement to streamline the administrative procedure and to reduce institutional transaction costs.
- Push back the deadline for completing the approval or record filing process
The current rules require that Chinese investors shall obtain an approval document or filing notice from the NDRC before the signing of a binding agreement in any ODI project that is subject to the NDRC's approval or record filing requirement, unless the investment agreement expressly states that the completion of the approval or record filing process is a condition of the effectiveness of the investment agreement.
Order No. 11 extends the deadline for obtaining the approval document or filing notice to "before the implementation of the investment", i.e. closing of the transaction. It prescribes that such government approval or filing notice will not be required until the Chinese investors or the offshore entities controlled by them start to contribute assets or interests or to provide finance or security to overseas projects. This will enable Chinese buyers to set obtaining government approvals or filing records as a condition to closing the transaction, which is consistent with international best practice.
- Further regulate ODI investment made by offshore subsidiaries
Pursuant to Order No. 9, any ODI project made directly by a Chinese investor, or through an offshore entity under their control and was financed or guaranteed by the onshore parent, is subject to the NDRC's approval or recording filing requirement. Investments made by offshore subsidiaries without financing or guarantee support from the Chinese parent are not covered by Order No. 9, thus not subject to the NDRC's approval or recording filing requirement.
The New Rules include all ODI projects made by overseas subsidiaries controlled by Chinese investors under its regime, regardless of whether financing or guarantee is provided by the Chinese parent. They expressly state that:
(a) Any sensitive project (which are projects in (a) sensitive countries or regions that have no diplomatic relations with China, experiencing war or civil disorder, or where investment is restricted by China's international treaties; or (b) sensitive industries which include (i) research, production and maintenance of weapons and military equipment, (ii) exploitation of cross-border water resource, (iii) news media, and (iv) other industries to be restricted by China's macro-control policy.) made by an offshore entity controlled by a Chinese parent should seek approval from the NDRC; and
(b) Any non-sensitive project (which are projects not in sensitive countries/regions and sensitive industries listed above) conducted by an offshore entity controlled by a Chinese investor and the investment amount from the Chinese investor is USD 300 million or more should file a "large non-sensitive project information report" with the NDRC before the implementation of the project.
For those non-sensitive projects made by offshore subsidiaries controlled by Chinese investors and the investment amount from Chinese investors is less than USD 300 million, no approval, record filing or reporting will be required under the New Rules.
- Simplify the submission process
According to the existing rules, if any Chinese investor (excluding enterprises managed by the central government) conduct an outbound investment project that is subject to the NDRC's approval or record filing process, the application documents should first be filed with the provincial-level NDRC, and the provincial-level NDRC shall review the application and then further submit it to the NDRC along with its review opinion.
The New Rules allow non-SOE Chinese investors to submit such application documents to the NDRC directly through the "management and service network system of outbound investment" established by the NDRC, which will speed up the administrative procedure and bring more certainty to the NDRC's approval or recording filing process.
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Extended period of validity of approvals or filing documents
The NDRC's approval document or filing notice under Order No. 9 is normally valid for two years in the case of construction projects and one year for other ODI projects. The New Rules extend the validity of an issued approval document or completed filing notice to two years for all ODI projects. This will give Chinese investors more flexibility to implement their overseas investments.
In addition to the major changes listed above, the New Rules also expressly prescribe that outbound investments implemented by domestic financial enterprise are required to comply with the NDRC's requirements under Order No. 11.
Brief Comments
Consistent with the Opinions on Further Guiding and Regulating Outbound Investment, the New Rules are committed to reinforcing the Chinese government's macro-guidance on ODI, promoting the sustainable and healthy development of overseas investment as well as protecting China's national security and interests.
- By simplifying the administrative procedure, Order No. 11 intends to bring additional transparency and certainty to the NDRC's approval and record filing process.
- The extended time period to obtain governmental approvals, and the longer validity period of such approvals, allow Chinese investors more room to structure and negotiate ODIs.
- At the same time, a previous "loop-hole" where investments made by offshore entities without parent financing / guarantee are not subject to NDRC's review is closed off, ensuring that all ODI activities fall within NDRC's purview.
Overall, the New Rules may help to enhance the predictability of Chinese investors' overseas investment, reduce their institutional transaction costs and offer them more flexibility in ODI transactions.
