Introduction
Stricter registration regime
Redefined scope of applicable transactions
Timing
On-lending
Prohibition list
Use of proceeds
Newly introduced continuing reporting obligations

Penalties


Introduction

In China, enterprises borrowing foreign debt from foreign lenders with a tenure of more than one year are subject to the supervision of China's National Development and Reform Commission (NDRC). On 10 December 2022, the NDRC promulgated the Administrative Measures for the Review and Registration of Mid- to Long-Term Foreign Debt of Enterprises (the measures). These rules came into force on 10 February 2023 and replace the existing rules set out in what is commonly known as the NDRC Circular 2044. (together with its amendments).

According to the NDRC's drafting notes to the measures, the context for the overhaul is twofold. First, the current regime has fallen behind market practice, including with respect to certain undefined terms that cause confusion. Second, the NDRC Circular 2044 is merely a compendium of departmental rules, whereas the measures are subject to formal legislative regulations. Therefore, from the point of view of China's legislature, the measures have higher legislative value.

What has changed and what remains between the measures and NDRC Circular 2044 will affect how foreign lenders and their counsel structure and plan their cross-border lending transactions. This article provides a few observations of the new rules that may be of interest to foreign lenders and their counsel.

Stricter registration regime

Under the NDRC Circular 2044, borrowing foreign debt is subject to the NDRC's "filing and registration" whereas under the measures it is subject to the NDRC's "review and registration". This effectively means that the NDRC will conduct a substantive review of the application before consenting to foreign debt registration and a Chinese borrower may not enter into lending transactions without first obtaining a "Certificate of Review and filing of Foreign Debt".

Redefined scope of applicable transactions

The measures clearly provide that they are applicable to "Chinese enterprises" (defined as enterprises whose main business operation is within China) and the companies controlled by them when they borrow foreign debt from foreign lenders with a tenure of more than one year (not inclusive), irrespective of the fact that they are all financial enterprises and non-financial enterprises. The type of transactions subject to the measures include:

  • commercial loans;
  • senior bonds;
  • convertible bond;
  • medium note; and
  • financial leasing.

The redefined scope of applicable transactions is much wider than the NDRC Circular 2044. The measures are also applicable to "indirect borrowing", which means companies incorporated outside China borrowing foreign debt leveraged by their equity, assets or similar interests within China.

Timing

Market participants worry about the measures changing the "review and registration" timeline to three months from the application is accepted. As a comparison, under the NDRC Circular 2044, the timeline was only seven working days, which was extended to 45 working days by a later NDRC guideline due to the covid-19 pandemic. This significantly impacts the transaction timeline. It also means that all commercial elements, such as those commonly included in the time sheet, need to be agreed as soon as possible.

On-lending

The measures provide that on-lending is prohibited unless the borrower's business licence includes a lending business or is permitted under the "Certificate of Review and filing of Foreign Debt". Where a holding company is a borrower (whose business licence does not have a lending business), the company may do on-lending to its subsidiaries, provided that the application to NDRC clearly specifies its intention.

Prohibition list

The measures provide that none of the Chinese borrowers, their controlling shareholders or de facto controlling persons must have, in the three years prior to the application, committed criminal offences relating to:

  • corruption;
  • bribery;
  • illegal possession of assets;
  • misappropriation of assets; or
  • sabotage of the socialist market economic order.

They must also currently not be under formal investigation on suspicion of other offences or of material violations of laws and regulations.

Use of proceeds

The use of proceeds must not:

  • cause harm to the information and data security of China;
  • increase the hidden debt incurred by local governments; or
  • be deployed for speculative purposes.

At the same time, the measures expressly prohibit any use of proceeds that is not in accordance with NDRC approval. This may cause problems as the use of proceeds may change after negotiation between a lender and a borrower. In case the use of proceeds changes, an updated NDRC review and registration process would be required before borrowing. In addition, the Chinese borrower must file a report with the NDRC on the status of the utilisation of foreign debt within 10 working days after the expiry of the NDRC registration.

Newly introduced continuing reporting obligations

Within five working days prior to the end of January and end of July of each year, the enterprise must file a report with the NDRC detailing:

  • the deployment of proceeds as of the applicable period;
  • the status of payment obligations; and
  • material information pertaining to the enterprise's operations.

Where a material development may affect the enterprise's ability to honour its debt obligations or, upon the occurrence of such material development, the enterprise must file a report with the NDRC in a timely manner.

Penalties

The NDRC Circular 2044 contained no penalty provision. The measures provide penalties for violation of the measures, which includes the applicants and intermediaries such as law firms, securities companies and accounting firms. This will certainly put such intermediaries in a risky position if they are found to have violated or assisted in violation of the measures.

For further information on this topic please contact Jieyu Gu at King & Wood Mallesons by telephone (+44 20 7111 2222) or email ([email protected]). The King & Wood Mallesons website can be accessed at www.kwm.com.