MOFCOM Devolves Approval Competency for Foreign Invested Holding Companies and Venture Capital Enterprises

By Xu Ping & Mark Schaub   King & Wood’s Foreign Direct Investment Practice

China’s Ministry of Commerce (MOFCOM) has recently issued a number of notices delegating approval competency to lower governmental levels. This delegation of approval competency to local authorities will greatly accelerate the approval process for foreign invested projects. Two prominent areas in this general policy of devolution are delegation of approval authority over (i) foreign invested holding companies and (ii) foreign invested venture capital enterprises (“FIVCEs”) as well as foreign invested venture capital management enterprises (“FIVCE Management Firm”).

A. Ease of Approving Holding Companies

On March 6th 2009, MOFCOM issued the Notice on Delegating the Approval Authority for Foreign Invested Holding Companies to streamline the establishment of foreign investment holding companies.

This notice provides:

1. Proposed holding companies with a registered capital of USD 100,000,000 or less will be examined and approved by the competent MOFCOM counterparts at the provincial or vice-provincial city level. Previously, the establishment of a holding company required MOFCOM level approval regardless of scale.

2. Any amendments to established holding companies (i.e. such as name change, revisions to business scope) can be approved by MOFCOM provincial level counterparts except for cases where a single capital injection increases its value by over USD 100,000,000 or where shareholders of holding companies change.

3. Despite the positive developments, MOFCOM also reinforces in the Notice that holding companies cannot invest in areas that are restricted or forbidden to foreign investment, or in industries that are subject to macro-control by the government. Further, if required by relevant industry rules, investments by holding companies will still need approval from the industry authorities even if approved at the local MOFCOM level.

B. Delegation of Approval Authority for FIVCEs and FIVCE Management Firms

MOFCOM further issued, on March 5 the Notice on Approving Foreign Invested Venture Capital Enterprises and Foreign Invested Venture Capital Management Enterprises (the “No. 9 Notice”) which simplifies the approval process for FIVCEs and FIVCE Management Firms.

The legal basis for setting up FIVCEs and FIVCE Management Firms are the Management Rules on Foreign Invested Venture Capital Emperies (the “FIVCE Rules”) promulgated by MOFCOM, the Ministry of Science and Technology, the State Administration for Commerce and Industry, the State Tax Administration, and the State Administration on Foreign Exchange on January 30, 2003. According to the FIVCE Rules, foreign investors are permitted to set up a FIVCE to invest in unlisted high-tech enterprises, provide management services to such enterprises and are also able to enjoy capital gains from such investments.

Pursuant to the FIVCE Rules, the establishment of a FIVCE adopts a multi tier approval process regardless of scale. A FIVCE requires preliminary examination at the MOFCOM provincial level with final approval from the central MOFCOM with the consent of the Ministry of Science and Technology. On the other hand the establishment of a FIVCE Management Firm only requires MOFCOM provincial level counterpart approval.

The No. 9 Notice simplifies the approval process in the following regards:

1. Proposed FIVCEs and FIVCE Management Firms with registered capital of no more than 100 million USD can be approved by MOFCOM counterparts at the provincial level (1), vice-provincial city level, or national economic development zone level. It is important to note that FIVCE Management Firms which were previously approved at the provincial level should now obtain approval from central MOFCOM in cases where its registered capital exceeds USD 100,000,000. Accordingly, the new policy is that establishment of a FIVCE can be approved locally except if the registered capital exceeds USD 100,000,000.

2. The provincial MOFCOM counterpart is required to complete the approval process and decide upon approval within 30 days after receiving the complete application documents. It is noteworthy that under FIVCE Rules, due to the two tier approval level regime, the mandatory approval timeframe is 60 days (15 days for preliminary review at the provincial level and 45 days for final approval by MOFCOM). Furthermore, following the delegation of approval authority in respect of FIVCEs, the No. 9 Notice requires that when establishing a FIVCE, the provincial approval authority shall request the opinion from the science and technology administration of the same level (i.e. the Ministry of Science and Technology provincial counterpart).

3. The basic rule has always been for amendments to the corporate structure for a FIVCE or FIVCE Management Firm to be approved by the original approval authority. The No.9 Notice changes this by allowing FIVCE or FIVCE Management Firms originally approved by MOFCOM to have subsequent commercial changes approved by MOFCOM’s provincial counterparts except for capital increases where the increase exceeds USD 100,000,000 or the change of “requisite investors (2)” in the FIVCE.

It should be borne in mind that although the No. 9 Notice simplifies the approval process and shortens the approval timeframe considerably the substantial requirements provided in the FIVCE Rules will still need to be strictly followed in many cases. These requirements include the restrictions on the business scope of a FIVCE, notably a FIVCE being prohibited from (i) obtaining loans to finance venture capital investments, (ii) investing in areas prohibited to foreign investment, (iii) directly or indirectly investing in the real estate market, (iv) directly or indirectly investing in publicly traded stocks or bonds, except for shares of the invested enterprises held by the FIVCE which are publicly traded after listing.)

Summary

The devolution of approval competency for holding companies, FIVCEs and FIVCE Management Firms will simplify and speed up the approval process for foreign investors as well as lower the work burden on MOFCOM. In addition, the new policy will simplify the operations of existing holding companies, FIVCEs and FIVCE Management Firms in that many will be able to bypass central MOFCOM approval for operational actions such as capital increases less than USD 100,000,000.
Although, there is no apparent negative impact upon foreign investors in these notices, it should be also noted that MOFCOM and other approvals still remain in place under specific circumstances. Foreign investors will need to carefully check which approvals at which level will be required in order to have a valid establishment and which restrictions remain in place.

(1) Vice-provincial cities, as an administrative division in China, are not treated as a province from an administrative perspective, but are distinct from a financial perspective.

(2) According to the FIVCE Rules, one shareholder of the proposed FIVCE must be a requisite investor i.e. a investor that meets the following requirements or thresholds: (i) the business of the requisite investor is venture investment; (ii) the capital under its management is not less than USD 100 million in the last three years prior to the application and at least USD 50 million of which has been used for venture investment; (iii) the investor shall have at least three professional management personnel with not less than three years experience in venture investment business; (iv) the requisite investors shall not have been prohibited by the judicial authorities or other relevant regulatory authorities from engaging in venture investment or investment and consultancy business or punished due to any fraud; (v) the amount of capital contribution subscribed to and paid in by the requisite investors shall not be less than 30% of the total subscribed capital and 30% of the total paid in capital of the FIVCE respectively.