Jan 28, 2018
On 25 January 2018, the Ministry of Commerce (“MOFCOM”), the State-owned Assets Supervision and Administration Commission (“SAAC”), the People’s Bank of China (“PBOC”), the China Banking Regulatory Commission (“CBRC”), the China Insurance Regulatory Commission (“CIRC”), the China Securities Regulatory Commission (“CSRC”) and the State Administration of Foreign Exchange (“SAFE”, and jointly with MOFCOM, PBOC, CBRC, CIRC, CSRC, “Outbound Investment Authorities”) jointly promulgated the Temporary Measures on Outbound Investment Filing(Approval) and Reporting (“Measures”) which entered into effect on 18 January 2018. The Measures did not replace the existing outbound investment rules promulgated by the respective authorities, e.g., MOFCOM’s Administrative Measures on Outbound Investment (2014), SASAC’s Measures for the Supervision and Administration of Overseas Investments by Centrally-administered State-owned Enterprises (2017), etc. Instead, the Measures are aimed at strengthening internal coordination and collaboration among the Outbound Investment Authorities and propose a number of new inter-authority mechanisms on outbound investment supervision. It is expected that each Outbound Investment Authority will issue implementing rules to correspond to the Measures.
In particular, the Measures set out the following new rules:
Destination and Target Disclosure
The Measures provide that domestic investors must disclose the final destination entity that will engage in project construction or operations when submitting outbound investment filings.
This disclosure requirement should be seen in relation to the Directive Opinion on Further Guiding and Regulating Outbound Investment, which was jointly issued by the National Development and Reform Commission (“NDRC”), the Ministry of Foreign Affairs (“MOF”), the MOFCOM and the PBOC and promulgated by the State Council on 4 August 2017, and is intended to govern the promulgation of the Measures. The Directive Opinion restricts domestic investors from setting up offshore SPVs and/or blind-pool investment funds which require special approval from Outbound Investment Authorities rather than ordinary filings. In practice MOFCOM also places restrictions on outbound filings and approvals for investments in offshore SPVs without substantial operations or investment funds as investment targets. The requirement under the Measures to disclose the final destination entity is a further step in an overall trend to provide PRC government authorities with a greater degree of transparency in outbound investment transactions and transaction structures.
The Measures obligate domestic investors to report to the authority that granted its outbound approval (“Approving Authority”). For most non-financial institutions, this will be the MOFCOM; for financial institutions, this will generally be the CBRC; and the CIRC and CSRC will be the Approving Authorities for investments in the insurance and securities sectors, respectively. The Measures provide primarily for two types of reporting obligations: periodic reporting and emergency reporting:
Previously, the Outbound Investment Authorities supervised outbound investments primarily through pre-closing filings and approvals. The Measures now expressly set forth new post-closing supervision requirements. Among those requirements is a post-closing inspection, which will be conducted on a random basis, but particularly required if any of the following exist:
The Measures require each Outbound Investment Authority to adopt a “double-random inspection and public disclosure” mechanism, which entails random inspections, by random inspectors (from one of the Outbound Investment Authorities), with the results publicly disclosed. The Outbound Investment Authorities will be required to issue detailed rules on the inspections and submit reports to the MOFCOM the random inspection results every six months. It is currently unclear whether the inspections will be mandatory or will occur randomly (but potentially more frequently).
Sanctions and Penalties
The Measures provide that, if any domestic investor breaches its obligations to obtain the required filing (approval) or to comply with the reporting obligations, the MOFCOM will work with the Outbound Investment Authorities and take sanction measures. These range from a compliance reminder, a meeting, public disclosure, and even including the non-compliance on the offender’s records in the publicly available National Enterprise Credit Information Publicity System. If the breach is material, then the Outbound Investment Authority should suspend the filing (approval) for the offender and take legal action against it.
The Measures signal a new high-water mark for the supervision on outbound investment in the PRC. In light of these measures, it is plausible that the Outbound Investment Authorities will more closely supervise outbound investments. In addition, some previously commonly used transaction structures, e.g., domestic guarantees of foreign investments without appropriate outbound investment filings, using foreign exchange channels, use of bridging transactions to cover the ultimate investment target, etc., will face new regulatory and supervisory challenges and heightened legal risks.
In recent interviews held in conjunction with the release of the measures, MOFCOM officials also mentioned that reinvestment by legally established offshore subsidiaries of domestic investors is still outside the current regulatory spectrum. Therefore domestic investors with legally established offshore subsidiaries will continue to have more flexibility when structuring offshore investments. However, any such investments in the amount of USD 300 million or more will be subject to pre-closing reporting mechanisms under the NDRC’s Circular 11 (see below).
In addition to the Measures, the NDRC promulgated the Administrative Measures on Enterprise Outbound Investment (“Circular 11”), which will enter into effect on 1 March 2018. The Measures and Circular 11 will be enforced in parallel going forward and all parties to a Chinese outbound investment deal are advised to pay close attention to the specific implementing rules promulgated by the NDRC based on Circular 11 and by the Outbound Investment Authorities conforming to the Measures when structuring the transaction.