Latest Q&As on the Overseas Investment by the NDRC
Since the National Development and Reform Commission ("NDRC") issued the Measures for the Administration of Overseas Investment by Enterprises (hereinafter referred to as the “Measures”) in 2017 and formally implemented on March 1, 2018, the NDRC has successively responded to the practical issues in the filing of overseas investments in the form of questions and answers on its official website. As of July 2021, a total of 115 Q&As have been published.
In this series of interpretations, we will briefly analyze the issues of concern in the 115 questions, taking into account practical cases from around the country and the policy guidelines of the NDRC and the Ministry of Commerce, in the hope of bringing some inspiration to investment entities intending to invest abroad.
Q: What policy documents do enterprises need to know beforehand to carry out overseas investment?
A: For policies at the level of the State Council, please refer to the Notice of the General Office of the State Council Forwarding the Guidance Opinions of the National Development and Reform Commission, the Ministry of Commerce, the People's Bank and the Ministry of Foreign Affairs on Further Guiding and Regulating the Direction of Overseas Investment.
For policies at the level of the National Development and Reform Commission, please refer to the Measures for the Administration of Overseas Investment by Enterprises, the Notice of the National Development and Reform Commission on the Release of the Supporting Format Text of the Measures for the Administration of Overseas Investment by Enterprises (2018 Edition) and the Notice on the Release of the Catalogue of Sensitive Industries for Overseas Investment (2018 Edition).
For policies issued by other departments, please consult the corresponding departments.
Sinobravo Comment
In recent practical cases in some regions, the local development and reform commission will prompt in the eighth part of the Notice of Filing of Overseas Investment Projects that those involving return investment shall not violate the Special Administrative Measures for Foreign Investment Access (Negative List). In other words, in addition to the above listed policy documents of the NDRC, those involving return investment also need to know the negative list of foreign investment (FDI) in advance.
Q: Does the Measures apply to the establishment of enterprises or other overseas investment projects by domestic natural persons outside of China?
A: According to Article 63, the Measures do not apply to investments made by domestic natural persons directly abroad. If a domestic natural person makes an investment abroad through an overseas enterprise controlled by the domestic natural person or an enterprise in Hong Kong, Macau or Taiwan, the Measures shall apply.
Sinobravo Comment
This Q&A echoes the current national policies and regulations on the establishment of enterprises outside of China by domestic natural persons. As far as the current policies and regulations are concerned, only the State Administration of Foreign Exchange (SAFE) Circular No. 37 has opened up a channel for domestic natural persons to set up special purpose companies outside of China to raise funds abroad and return to invest.
Q: Do domestic foreign-invested enterprises need to comply with the relevant procedures in accordance with the Measures when making overseas investments?
A: Yes.
Sinobravo Comment
Many investors have asked about this question. Sinobravo gave positive responses to them in accordance with the legal provisions and practical experiences. NDRC now has clarified the matter in the Q&A.
Q: Is the Measures applicable to the situation where a domestic enterprise A directly acquires a domestic asset C from a foreign enterprise B whose principal asset C is located in China?
A: According to Article 2, the acquisition of foreign enterprise B and its interest by domestic enterprise A is an overseas investment fall within the scope of overseas investment as referred to in the Measures, and the Measures apply.
Q: If foreign enterprise B only holds domestic assets C and domestic enterprise A acquires B, are these acts considered as acquisition of an investment platform with no specific industrial projects abroad?
A: If foreign enterprise B only holds domestic assets C and does not engage in fund investment or other related activities, the acquisition of B by domestic enterprise A is not an acquisition of an investment platform with no specific industrial projects abroad.
Sinobravo Comment
The above two Q&As further clarify that return investment projects fall under the regulation of offshore investments. In addition, if the offshore company is only a platform company, and the platform company is not involved in fund investment or other related activities, it will not be considered as an investment platform without specific industrial projects and will not be classified as a sensitive project.
However, return investment projects should not violate the FDI negative list.
Q: A domestic enterprise A intends to acquire a foreign enterprise b of a domestic enterprise B. The funds for the transaction will be paid in Chinese mainland. Does the Measures apply to this type of situation?
A: Yes, this situation is an overseas investment and the Measures applies.
Q: Domestic enterprise A signs an agreement with overseas enterprise B to acquire overseas enterprise b held by B. The source of funds is A's own funds outside the country and no cross-border financial flows are involved. Does the Measures apply to this type of situation?
A. In the above situation, domestic enterprise A has invested its interest in the assets and acquired ownership of the offshore asset b. This is an overseas investment and the Measures applies.
Sinobravo Comment
The above two Q&As further clarify that projects with domestic delivery will also be included in the scope of foreign investment regulation, provided that the domestic enterprise has invested in the assets and interests, etc., and has obtained ownership and control of the offshore assets.
We have been asked frequently about this issue in the past. As domestic transactions will not be subject to foreign exchange regulations, some projects have not fulfilled the regulatory procedures for offshore investments, making the compliance of holding interests in offshore assets flawed and, in turn, affecting/hindering the subsequent repatriation of offshore earnings to the country.
Q: A domestic enterprise A intends to acquire a foreign enterprise B for $0. B's financial report shows that B has certain assets. Does the Measures apply to this type of situation?
A: If domestic enterprise A neither has assets or equity inputs such as currency, securities, in-kind, technology, intellectual property rights, equity, debentures, etc., nor provides financing or guarantees in the acquisition of B, it is not an overseas investment and the Measures does not apply.
Q: A domestic enterprise A has set up company a, a wholly-owned subsidiary in Hong Kong. Company a has set up a wholly-owned directly subsidiary b in Hong Kong. Now A intends to acquire b so that it becomes its own subsidiary. Does the acquisition of b by A require the approval and filing procedures for overseas investment?
A: If A wholly owns overseas company a and a wholly owns overseas enterprise b, A does not acquire any new overseas assets or interests in b, so there is no need to comply with overseas investment approval or filing procedures.
Sinobravo Comment
In the above three questions and answers, the NDRC replied that cases where the acquisition consideration is zero or the equity increase is not included in the regulation of overseas investment.
We have doubts about this answer. From a practical point of view, when a domestic enterprise acquires an equity interest in an overseas enterprise, the subsequent return of the overseas proceeds to the domestic market will be regulated by the bank/foreign exchange regulator in accordance with the return of overseas investment funds. If a company cannot provide complete filing documents from the commercial and development and reform departments, it may not be able to successfully repatriate the funds.
Accordingly, we recommend that domestic enterprises apply for the notional consideration of the shares of the foreign enterprise as consideration or foreign investment funds, and file for offshore investment and actually remit the funds to meet the dual requirements of the National Development and Reform Commission and the foreign exchange regulatory authorities.
Q: A domestic enterprise A intends to purchase convertible corporate bonds issued by an overseas enterprise B. Or a domestic enterprise A intends to convert its holding of convertible bonds of overseas enterprise B into its equity interest in B. Does the Measures apply to this type of situations?
A: The Measures applies to the latter situation but not to the former one.
Sinobravo Comment
On this issue, we have previously responded to investors as described above, in accordance with legal requirements and practical experiences. The NDRC has now clarified this matter in this Q&A.
Q: Province (or city) A is carrying out pilot work on Qualified Domestic Institutional Investors (QDII), Qualified Domestic Limited Partners (QDLP) and Qualified Domestic Investment Enterprises (QDIE). The scope of application may include situations where domestic enterprises invest in acquiring equity interests in overseas unlisted enterprises, acquiring shares in overseas listed enterprises that are not publicly issued and traded, and investing in overseas private equity investment funds, which constitute overseas investments. Is it necessary for investment entities to carry out overseas investment approval and filing procedures through QDII, QDLP, QDIE and other channels?
A: If an investment entity carries out overseas investment through QDII, QDLP or QDIE, and the relevant investment activities fall within the scope of Article 2 of the Measures, the investment entity shall comply with the relevant procedures for overseas investment in accordance with the Measures.
Sinobravo Comment
This Q&A responds to a case in the market recently, and the NDRC has responded to the reasons for the punishment in this case by way of a Q&A to remind investors.
Previously, it was generally understood that overseas investments made by investment entities through QDII, QDLP and QDIE did not fall within the scope of NDRC's supervision. Only overseas investments made by domestic enterprises directly or by overseas enterprises under their control were subject to NDRC's overseas investment supervision procedures.
According to this Q&A, we understand that any subsequent overseas investment through QDII and other means will be subject to the NDRC's overseas investment supervision procedures as long as it falls within the scope of Article 2 of the Measures. Investment projects that fall into the sensitive category require an application for approval. Where the investment project is in a non-sensitive category, an application for filing is required. The pre-requisite regulatory procedures need to be completed in advance.
Q: A domestic enterprise A holds 10% of the equity interest in a Hong Kong listed manufacturing enterprise a. It now intends to purchase 2% of the equity interest from the secondary market in Hong Kong and will hold 12% of the equity interest in enterprise a upon completion. Does the Measures apply to this type of situation? A is unable to issue a purchase agreement for the purchase of shares in the secondary market, how should it apply to the development and reform department for filing procedures?
A: Domestic company A continues to purchase 2% equity interest in the secondary market when it already holds 10% equity interest in Hong Kong enterprise a. This is a direct investment, i.e. it is an overseas investment within the scope of the Measures. According to the Notice of the National Development and Reform Commission on the Issuance of the Supporting Format Texts of the Measures for the Administration of Overseas Investment by Enterprises (2018 Edition), where an agreement or similar document cannot be obtained before the implementation of the project, the investment entity may not provide the relevant annexes after making a reasonable and sufficient explanation.
Sinobravo Comment
Through this Q&A, the NDRC has responded to the feasibility of investing in secondary markets abroad under certain circumstances. However, whether such secondary market investments can be approved by the commercial authorities and thus whether the foreign exchange registration of overseas investments and the smooth remittance of funds can be successfully completed is subject to further confirmation with the commercial and foreign exchange regulatory authorities as well as the operating banks.
Q: A domestic enterprise or institution establishes a representative office or an office abroad, which does not directly engage in business activities but is only responsible for business liaison within the scope of business of the domestic enterprise or institution. Will the approval and filing authorities accept such acts?
A: If a domestic enterprise or institution establishes a representative office or an office abroad, the approval or filing authority may accept it with reference to a new enterprise established by a domestic enterprise abroad.
Sinobravo Comment
Previously, in practice, a domestic enterprise or institution setting up a representative office or office abroad only needed to file with the commercial department in the case of setting up a branch abroad, and then register with the bank for foreign exchange. According to this answer, in such cases, the management will be changed. It is better to take the advice of the competent authorities and consult a local bank in advance.