China’s NDRC to Raise Bar for Outbound Investment Supervision

On 11 February 2018, China’s National Development and Reform Commission (“NDRC”) promulgated the Catalogue of Sensitive Industries for Outbound Investment (2018 Edition, “Catalogue”) as mandated under the Administrative Measures on Enterprise Outbound Investment promulgated by the NDRC on 26 December 2017 and will enter into force on 1 March 2018 (“Administrative Measures”). Simultaneously, new Template Documents for Administrative Measures on Enterprise Outbound Investment (2018 Edition, “Template Documents”) were published. The Template Documents, the Catalogue, and the Administrative Measures will replace the Administrative Measures on the Approval and Filing of Outbound Investment Projects (“Current Measures”) and the standard form submission documents currently in use for outbound investments by investors in the People’s Republic of China (for the purpose of this newsletter excluding Hong Kong, Taiwan and Macau, “PRC”) under the supervision of the NDRC. Overall, the Catalogue and the Template Documents under the Administrative Measures appear intended to result in outbound investments being more closely monitored by and made more transparent to the NDRC as compared to Current Measures.

The Catalogue

Under the Administrative Measures, outbound investments must either obtain approval from or complete filing with the NDRC or its local branches. Approval is usually more difficult and time consuming than filing. Outbound investments are only required to be approved by the NDRC if: (a) the destination state or region is “sensitive”, i.e., where the destination state or region does not have diplomatic relationship with China, is in war or insurgency, is under international sanction or other restrictions for investment; or (b) the target company is or will be engaged in one of the “sensitive” industries named in the Catalogue.

The sensitive industries listed in the Catalogue mainly fall into two sub-categories: (a) certain industries mentioned in the Administrative Measures, including research, production and repairs of arms and equipment, trans-border development of water resources, news and media; and (b) the industries listed as “restricted” under the Directive Opinion on Further Guiding and Regulating Outbound Investment jointly issued by the NDRC, the Ministry of Commerce (“MOFCOM”), the Ministry of Foreign Affairs (“MOF”) and the People’s Bank of China (“PBOC”) on 4 August 2017 and promulgated by the State Council, which include:

• Real Estate
• Hotels
• Theatres
• Entertainment
• Sports Clubs
• Offshore Equity Funds or Investment Vehicles without Specific Industrial Target

The Administrative Measures expressly cover indirect investments as well, by providing that any offshore enterprise that is controlled by PRC entities or individuals are also subject to NDRC approval when investing in sensitive industries offshore (regardless of whether the investment is funded by PRC-sourced funds). This expansion may have a profound impact on China’s outbound investment and M&A market. For example, theoretically real estate companies listed in Hong Kong or the US with PRC controllers will be subject to NDRC approval when investing in offshore projects that involve real estate, hotels and/or theaters.

In addition, the term “entertainment” is not specifically defined in the Catalogue and could be subject to broad interpretation. Going forward, PRC investors (including offshore companies controlled by PRC controllers) should be sure to verify if the potential target company is involved in any entertainment business (e.g., film, TV series, games, live shows, etc.), and if so, the need to obtain NDRC approval should be carefully evaluated.

We also note that the establishment of “blind pool” equity investment funds or investment vehicles are also included in the Catalogue and subject to NDRC approval. As a result, NDRC approval will be needed for the common transaction structure where a PRC investor invests in blind pool offshore equity funds via offshore investment vehicles.

Template Documents

Unlike the government filing and approval documents under the Current Measures, the Template Documents now require that an equity structure chart showing the ultimate controller of the investing entity be disclosed. Based on the Template Documents, if the investing entity is a company, it should disclose the top five largest shareholders by shareholding ratio, and any other shareholders holding 10% or more of the investing entity’s equity. If the investing entity is a partnership, it should disclose any general partners and the top five limited partners by capital commitment ratio. In the case of each of the foregoing, disclosure should include any indirect controllers and their methods of control, such as nominee shareholding arrangements or contractual control.

According to the Administrative Measures, if a PRC investor conducts an offshore investment in an amount of over USD 300 million via a controlled offshore entity that is engaged in an industry not categorized as sensitive in the Catalogue, the investor must submit to the NDRC a Large Amount Non-sensitive Outbound Investment Reporting Form (“Reporting Form”). Currently, the NDRC’s new online reporting system has not yet been launched and no further information on this reporting has been provided. Therefore, it is unclear if this requirement is only an administrative information disclosure procedure or if it will be a new substantive review. However, the Template Documents include a Reporting Form that includes the disclosure of similar information as that required for outbound investment filing, including a shareholding structure chart of the investing entity reflecting the ultimate shareholder.

The Administrative Measures also provide that the NDRC will maintain records of non-compliance of outbound investment, and regularly publish any breaches of the Administrative Measures by PRC entities and the resulting administrative sanctions. This information will also be recorded and published on credit information disclosure websites, such as the NDRC’s National Credit Information Sharing Platform, the AIC’s National Enterprise Credit Information Publicity System, Credit China, etc. The NDRC will also collaborate with other administrative departments for joint enforcement on any offenders. Together with the newly included   disclosure requirements, it is expected that the NDRC’s ability to enforce the Administrative Measures will be further strengthened. It is not clear, however, if the NDRC’s enforcement of the Administrative Measures will be in coordination with the Temporary Measures on Outbound Investment Filing (Approval) and Reporting, which was jointly promulgated on 25 January 2018 by the MOFCOM, the State-owned Assets Supervision and Administration Commission, the PBOC, the China Banking Regulatory Commission, the China Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange. Those measures set forth a “double-random inspection and public disclosure” mechanism, which entails random inspections, by random inspectors, with the results publicly disclosed.

Conclusion

In light of the above, the Catalogue and the Template Documents promulgated by the NDRC are expected to raise the bar for outbound investment supervision by NDRC and all market players in the PRC outbound investment market are advised to take caution.