On April 8, 2014, the National Development and Reform Commission ("NDRC") promulgated the Measures for the Administration of Approval and Filing of Outbound Investment Projects (the "New Measures"), and revoked the October 2004 Provisional Measures for the Administration of Examination and Approval of Outbound Investment Projects (the "Old Measures"). The New Measures come into effect on May 8, 2014, and signal a fresh streamlined approach that should simplify outbound investments.
Consistent with broader policy set by the State Council in late 2013,1 the New Measures streamline the regulatory process and delegate approval authority for outbound investment. A new emphasis on filing, rather than substantive review and approval, should enhance efficiency and facilitate outbound investment generally. This in turn is likely to increase the competiveness of Chinese investors in the global market.
Limiting Approval Requirements and Increasing Filing for the Record
Under the New Measures, approval for outbound investments vests solely in NDRC and the State Council. Only two types of outbound investments are subject to substantive review and approval by NDRC: any investment of USD1.0 billion or more,2 and regardless of amount, any investment involving sensitive countries and regions3 or sensitive sectors.4
State Council approval is required only for an investment of USD2.0 billion or more that also involves sensitive countries and regions or sensitive sectors. All other outbound investments need only be filed for the record. The nature of the investor and the amount of the investment determine where the filing must be made. Investments by centrally administered State-owned enterprises and investments of USD300 million or more by locally managed State-owned enterprises are to be filed with NDRC, and investments of under USD300 million by locally managed State-owned enterprises are to be filed with the relevant provincial investment authorities.
Filing, like approval, must be done prior to the consummation of the outbound investment. However, the time limits and documentation required for the two procedures differ. Approval takes more time and the documentation required is more extensive. If approval is required, the investor must submit relatively comprehensive application materials, including an application report and various transaction documents. Generally, NDRC is required to make a decision within twenty working days from the date on which the submission for approval is accepted for review.
If the investment requires only filing for the record, the time limit for NDRC is seven working days. Given that a considerable portion of outbound investments are unlikely to reach or exceed the USD1.0 billion threshold, or otherwise require affirmative approval, the streamlined time frame for filings should speed up the overall process for many outbound investments.
Nonetheless, filing for the record is not a mere formality. The investment will be assessed substantively, particularly with respect to whether the investment complies with national laws, regulations, industrial policies and outbound investment policies, whether it is consistent with requirements for managing capital projects, and whether the investor is capable of executing the investment. If the investment is deemed lacking on these or other relevant grounds, NDRC may, in its discretion, refuse the filing. In addition, for any outbound acquisition or bidding project of USD300 million or more, whether subject to approval or to a filing process, the information reporting system found in the Old Measures has been retained in the New Measures. Consequently, before proceeding with the investment, the investor must report specific project information to NDRC, and it must obtain a confirmation letter from NDRC before the investment is consummated.
Additional Express Time Limits
In addition to the time limits mentioned above, the New Measures specify time limits for certain other key procedures. For outbound investment projects involving sensitive countries or regions or sensitive sectors, NDRC is required to solicit opinions from the relevant authorities within three working days after the application materials are accepted for review. In addition, if the documentation is found lacking, NDRC must within five working days notify the investor to request corrective action (including the submission of additional material). The New Measures state that NDRC may only do this once. These express time limits should help investors anticipate progress with a greater degree of certainty.
Simplifying the Process
The New Measures do away with layers of reporting,5 stating that an investor may submit its application documents directly to the provincial NDRC for reporting on to the central NDRC. The bureaucratic process appears to be more streamlined, which in turn may result in shorter lead times for approval or filing.
Approval or filing for offshore investments through offshore entities controlled by Chinese concerns has been eliminated, unless the investment involves financing or a guaranty from a Chinese entity. This should be a welcome change for investors with existing offshore vehicles. It may also drive more Chinese entities to pursue pure offshore structures that could facilitate investments outside of China going forward.
The New Measures eliminate the need for separate approval of pre-investment expenses. Note, however, that pre-investment expenses are still counted toward the investment amount (and the relevant threshold amounts for approvals and filings). Review of pre-investment expense payment requests are now to be considered "by reference to" the rules for investment approval and filing for the record. Hopefully, this will further ease the bureaucratic burden for investments that are subject only to filing requirement.
Shelf Life of an Approval and a Filing
The Old Measures did not specify the duration of an approval or a filing, and practice varied from project to project and among NDRC offices. The New Measures expressly state that an approval or filing is valid for one year (counting from the date of issuance of the approval or the confirmation of filing). Only construction projects are given two years. In each case, however, there is always the possibility of seeking an extension (so long as this is done before the expiration of the relevant period).
Noncompliance May have Consequences
The New Measures now make it clear that proceeding absent a required approval or filing, or proceeding with an investment in a manner inconsistent with the approval or filing may have regulatory consequences. Specifically, NDRC has express authority, working together with other relevant regulators, to order the investor to halt the investment. NDRC may also refer the case to the relevant authorities for legal or administrative action against the persons responsible for the non-compliance.
The New Measures outline a streamlined regulatory system for outbound investments that should see increased use of the filing for the record procedure. Several key ambiguities have been clarified and a number of express time limits are set out. Although the filing system is more than a mere formality and continuous reporting is still required, the new regulatory regime is welcome development.
Haiwen will monitor developments as the New Measures are rolled out, and report on significant developments as they arise.
1 See the List of Investment Projects Subject to Governmental Approval (2013 version) (promulgated on December 2, 2013 by the State Council).
2 These thresholds apply only to the amount to be invested by Chinese investors. Amounts invested by non-Chinese investors are ignored for a purpose of determining with the approval threshold is met.
3 This includes countries which have no diplomatic relations with China, countries or regions which are subject to international sanctions, and countries and regions experiencing war or civil strife.
4 Sensitive sectors include basic telecommunication services, development and exploitation of cross-border water resources, large-scale land development, electrical transmission trunk lines, power grids, news media and others.
5 Under the Old Measures, investment applications were typically submitted to the local NDRC office at the district, city or county level. The local office would transmit the application up the NDRC chain of authority, for final review by the provincial or central NDRC.
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