Nearly a year after the Ministry of Industry and Information Technology (MIIT) lifted the restriction on foreign ownership of e-commerce companies (click to see our previous analysis), Heiwado (China) Co., Ltd. (“Heiwado China”) becomes the first wholly foreign-owned company that has been issued a value-added telecom service (VATS) license by the MIIT. It could herald a new age for foreign companies wishing to operate a third-party e-commerce trading platform in China.

Background

On 19 June 2015, MIIT issued Circular 196 (“Circular 196”), which allows foreign investors to hold up to 100% equity in a company operating online data processing and transaction processing service (e-commerce), a type II VATS under the 2015 Classified Catalogue of Telecommunications Services. Prior to Circular 196, foreign investors were permitted to hold no more than 50% equity in a VATS company, and in fact only a handful of foreign investors were actually granted the VATS license by MIIT.

MIIT issued Circular 196 against the backdrop of the central government's express support for developing e-commerce business and lifting control on foreign ownership. The online data processing and transaction processing service (e-commerce) is understood to be the category of VATS for e-commerce companies that operate a platform for transactions between third-party merchants and their customers (“Platform E-commerce Service”) and derive their income from the service fees and commissions. A VATS license is usually not required for companies selling products online for their own profit.

Highlights of Heiwado Case

1. About Heiwado China

Heiwado China, established in 1994, is registered in Hunan province with a registered capital of US$50 million, currently wholly owned by two Japanese companies, Heiwado Co. Ltd (平和堂株式会社, 95%) and Koizumi Clothing Co. Ltd (小泉服装株式会社, 5%). Its main business has been operation of department stores in Hunan province. In 2012, its own online store (www.52pht.com) went into operation, which sells goods in Heiwado's name and therefore does not require a VATS license.

2. The License

The service scope of the VATS license issued to Heiwado China states “data processing and transaction processing service (operational e-commerce only)”, which means that Heiwado China may now carry out Platform E-commerce Service for trading between third parties. Interestingly, the serial number of the VATS license issued to Heiwado China still contains the Chinese character denoting licenses issued to sino-foreign joint ventures. This could be because that the system of the MIIT is yet to be updated to cater for the new category of wholly foreign-owned VATS provider.

3. Application Timeline

Circular 196 came into force in 19 June 2015. The approval letter was issued on 11 January 2016 and the VATS license was issued on 28 April 2016 and made public on 31 May 2016 in an official notice for collection of the licence. The statutory time limit for issuing an approval by MIIT on VATS license application is 90 days from acceptance of the application. We do not know when Heiwado China first submitted the application to MIIT, but it seems that it will take at least 6 – 9 months for the applicant to actually receive the VATS license.

Our Observations

1. More WFOEs to Obtain VATS License

In fact, Heiwado China is not the first WFOE to be issued an approval by MIIT on operation of Platform E-commerce Service. Newheight E-commerce Business (Shanghai) Co., Ltd (纽海电子商务(上海)有限公司) (“Newheight China”), the operator of the well-known yhd.com, obtained MIIT approval on online data processing and transaction processing service on 31 December 2015. The reason why Heiwado become the first WFOE to be issued VATS license is likely to be that Newheight China already obtained the VATS license for online data processing and transaction processing when it was a sino-foreign joint venture and the approval was issued as an amendment to its current VATS license to reflect the fact that it had become a WFOE when its foreign shareholder Newheight Corporation Limited acquired 100% ownership of Newheight China.

On 21 March 2016, the operator of meilishuo.com, an e-commerce website of women's fashion, received approval for operating online data processing and transaction processing service. The website operator is wholly owned by a foreign company.

Moreover, DangDang Information Technology (Tianjin) Co., Ltd (当当网信息技术(天津)有限公司) and Guangzhou Global Market E-commerce Co., Limited (广州环球梦电子商务股份有限公司), each obtained the approval on online data processing and transaction processing service. In both cases, the foreign shareholders hold majority equity exceeding 50%.

It seems that Heiwado is not a unique case under Cricular 196. As we anticipated in our previous article, MIIT will continue implementing Circular 196 so long as the policy of the central government to encourage e-commerce remains effective.

2. Application Criteria and Process to be Clarified

Over a year after the publication of Circular 196, we have still not seen the MIIT publishing application criteria and procedures for WFOEs. The uncertainty created thereby will undoubtedly deter foreign investors from making applications.

If MIIT still goes by the 2008 Administrative Measures on Foreign-invested Telecom Enterprises (which only contemplate applications by sino-foreign joint ventures) in processing applications made by WFOEs, then the most important issue would be whether the requirement would apply that the foreign investor must have “good track record and operational experience in running VATS”.

Among the approved cases under Circular 196, we notice that most of direct foreign shareholders do not have a track record in operating VATS or Platform E-commerce Service. In fact, some of the approved companies are connected to websites currently run under a VIE structure.

When Circular 196 was first published, it was widely seen as a step towards removing obstacles for VIE-structured e-commerce companies to dismantle the structure and return to China. It seems that some companies have reaped the benefit. If the requirement for track record and operational experience is not strictly enforced, then we would anticipate more companies with foreign majority shareholding to obtain the license for the Platform E-commerce Service.