On April 13, 2016, the National Development and Reform Commission (NDRC) published a consultation paper (Consultation Paper) on its website, seeking public opinion on the amendments (Amendments) proposed for the “Administrative Measures for the Verification and Record-filing on Outbound Investments Projects” issued in April 2014 (No.9 Regulation). Public opinion must be submitted by 13 May 2016, and NDRC is expected to officially promulgate the revised No.9 Regulation soon after the deadline.   

The Amendments look quite limited, but have some encouraging developments. 

Substantial changes to “road-pass” regime

Article 10 of No.9 Regulation stipulates that “when undertaking overseas acquisitions or bidding projects with the total investment amount exceeding USD300 million (inclusive), Chinese investors shall submit a project information report to NDRC before carrying out any substantive work. Within 7 business days after receiving the project information report, NDRC shall issue a confirmation letter if the investment complies with state’s outbound investment policy. NDRC will separately release the standard project information report format.”

According to the regime prescribed under No.9 Regulation (which inherits the regime first established by No.1479, Faigaiwaizi [2009] Regulation), NDRC has the (unfettered) discretion on whether a confirmation letter shall be issued to a Chinese investor, on the basis of whether its investment proposal “complies with state’s outbound investment policy” — this initial information reporting and confirmation regime, which has attracted great market interests and comments since its inception, is commonly known as the “road-pass” regime.     

It was well understood that the intention behind the road-pass regime is to prevent Chinese investors from competing against each other for the same assets at the costs of the Chinese state. For this very reason, although it is never explicitly written in the NDRC regulations, the market perception has been that there would only be one road-pass issued for a given transaction. Such perception can somewhat be justified, both from our own transaction experience as well as from a number of widely-reported China outbound transactions (in particular, the competition between heavy machinery manufacturers Sany and Zoomlion for the Germany company Putzmeister back in 2012,  and the more recent transaction whereby Tsinghua Unigroup was competing against PDSTI for the NASDAQ listed RDA). 

Nevertheless, in the Tsinghua Unigroup/RDA transaction, Tsinghua (the higher bidder without the road-pass) successfully avoided the road-pass issue and subsequent NDRC verification requirements by funding the transaction through offshore financing facilities. The transaction is a telling case demonstrating that in an increasingly market-driven and competitive economic environment, it is also increasingly difficult for the regulators to try to interfere with the intrinsic market mechanism using administrative measures.        

In particular, recently reported transactions and our own experience suggest that multiple road-passes were indeed granted by NDRC to several competing Chinese bidders in one transaction. So even well before this new move by NDRC, road-pass regime has already been relaxed in practice.     

The Consultation Paper removes the requirement that “the investment complies with state’s outbound investment policy”, and changes reference of “to issue a confirmation letterwithin 7 business days” to the reference of “to issue an acknowledgement letter within 7 business days”. Those changes are “subtle”, but are material. The substitution of the “confirmation letter” mechanism under No.9 Regulation by the “acknowledgement letter” mechanism will substantially change the crux of road-pass regime under NO.9 Regulation.      

The Consultation Paper still maintains the requirement that “when undertaking overseas acquisitions or bidding projects with the total investment amount exceeding USD300 million (inclusive), Chinese investors shall submit a project information report to NDRC before carrying out any substantive work.” However, NDRC will no longer consider whether the concerned project (investment) “complies with state’s outbound investment policy” and shall instead issue an “acknowledgment letter” to any Chines investor submitting the report to — in other words, if more than one Chinese investor submits project information reports to NDRC, they will each receive an  “acknowledgement letter” from NDRC.  

The Consultation Paper also makes it clear that so long as a project information report is submitted by the Chinese investor per the relevant regulations, irrespective of whether an “acknowledgement letter” is issued or not, NDRC shall not impose any sanctions on the investor. Whereas under No.9 Regulation, if a Chinese investor initiates any “substantive” work overseas without obtaining the “confirmation letter”, they shall be penalized.    

Other deregulation proposals

The Consultation Paper further proposes four major amendments to the NDRC outbound investment regulatory regime, as further explained below. 

1.Further clarifications on the scope of verification

Under No.9 Regulation, in addition to outbound investment projects involving “sensitive country or region” or “sensitive industry”, any outbound investment project “with the Chinese party's investment amount exceeding USD 1 billion (inclusive)” shall be “verified” by NDRC (read “substantive review”).  

In December 2014, NDRC issued “the Decision on Revising Relevant Provisions of the<Administrative Measures for Verification and Record-filing of Outbound Investment Projects> and the <Administrative Measures for Verification and Record-filing of Foreign Investment Projects>” (“No.20 Regulation”), which amends, amongst others, No.9 Regulation. As a result, only those outbound investment projects involving “sensitive country or region” or “sensitive industry” are still required to be verified by NDRC. 

Since No.20 Regulation was issued separately without re-issuing the revised No.9 Regulation, No.20 Regulation did not attract much attention of the market.  Furthermore, the languages (complicated or confused by the punctuations used) of No.20 Regulation has caused the market to have different interpretations on whether outbound projects with “significant investment amount” still requires NDRC verification. The Consultation Paper consolidates No.20 Regulation with No.9 Regulation and clarifies the ambiguities, making it clear that only those outbound investment projects involving “sensitive country or region” or “sensitive industry” require NDRC verification (so the investment amount is not a consideration relevant to NDRC verification anymore).  

2. Removal of State Council verification process

No.20 Regulation requires that for outbound investment projects involving “sensitive country or region” or “sensitive industry”, if “the Chinese party's investment amount exceeds USD 2 billion (inclusive)”, NDRC shall submit its opinion for the State Council to verify.  The Consultation Paper deletes this requirement, which simplifies the verification procedure and increases the predictability of projects requiring verification.

3. Letter of intent from financiers no longer required

For projects requiring verification, “the letter of intent issued by banks” is no longer required to be submitted as a supporting document to the project application report. 

4. Review opinion of provincial-level counterparts of NDRC no longer required

No.9 Regulation requires that for outbound investment projects by local enterprises, the concerned local enterprises need to submit their project application reports to the provincial-level counterparts of NDRC at the place where those enterprises are based.  Those provincial-level counterparts of NDRC shall then form their review opinion which shall be submitted to NDRC.

The Consultation Paper removes such requirement, as such in the future, provincial-level counterparts of NDRC shall instead directly submit local enterprises’ project application reports to NDRC. 

This will simplify the verification procedure and provides equal treatment for local enterprises and centrally-administered state-owned enterprises -- under No.9 Regulation, centrally-administered state-owned enterprises are only required to submit a project application report to NDRC directly, without the review process by provincial-level counterparts of NDRC.

Conclusion 

The Consultation Paper still requires “the Chinese party's investment amount exceeding USD300 million (inclusive)” to be “reported” to NDRC and to obtain the “acknowledgement letter”, whilst stresses that “where the investor of a project required to submit a project information report per Article 10 but carries out substantive work before submission of such report, NDRC shall publish a criticism notice and order it to make rectifications. Where the nature of such breach is of serious consequence, causing serious damages to the national interest, NDRC shall, in conjunction with relevant departments, legally impose a penalty thereon, and request, or transfer the case to, relevant authorities to legally investigate the legal and administrative liability of the relevant responsible person.

While the purpose and necessity for NDRC to retain (at least partially) the road-pass regime remains debatable, many market transactions have demonstrated that overall, the road-pass regime has not served the original purpose of supervision. Instead, it has restricted the market-driven investment by Chinese outbound investors. There is also a concern that private enterprises may be treated differently when they compete with SOEs for a road-pass. This process has reduced the certainty of Chinese outbound investment whilst increased their transaction costs, noticeably in competitive bidding process typical in offshore jurisdictions. To resolve the “bidding war” issue perceived on Chinese outbound investors, regulators need to think beyond the traditional “supervisory” approach, and instead with a holistic reform approach. This may include the more fundamental reforms on SOEs’ ownership structure, and on overseas investment financing system. Also, Chinese investors need to learn and explore those sophisticated transaction structures (such as consortium bid) for their cross-border investment.

The past few years have seen NDRC and MOFCOM (Ministry of Commerce), the two most important authorities regulating Chinese outbound investment, to steady simplify and deregulate the Chinese outbound investment regulatory regimes. The release of the Consultation Paper again sends a strong message to the market that this deregulation trend is to continue.

In particular, the amendments proposed for the road-pass regime, signal the major shift by Chinese regulators on their regulatory approach, being the preference for the “invisible hand of the market” to operate and influence the investment behaviors of Chinese outbound investors. It is certainly an encouraging step to move forward.