by Xiong Jin Sun Rui King&WoodMallesons’ Mergers & Acquisitions Group

The National Development and Reform Commission (“NDRC”) has finally promulgated the long awaited “Administrative Measures for Verification and Registration of Overseas Investment Projects (《境外投资项目核准和备案管理办法》)” (“Order 9”).

The State Council promulgated “Catalogue of Investment Projects Subject to Governmental Verifications (2013(《政府核准的投资项目目录(2013年本)》)” (“2013 Catalogue”) on 2 December 2013, under which the approval powers of NDRC and the Ministry of Commerce (“MOFCOM”) on Chinese overseas investment are significantly reduced and decentralised. (For detailed discussions on changes introduced by 2013 Catalogue to the existing verification regime of Chinese outbound investment, please refer to our client alert, “Catalogue of Investment Projects Subject to Governmental Verifications (2013) Overhauls Chinese Outbound Investment Regulatory Regime.) As 2013 Catalogue only provides for general principles, the market has been waiting for the two most powerful approval bodies to release their respective implementation rules.

In the spirit of the principles set out in 2013 Catalogue, Order 9 substantially amended the “Tentative Measures for the Administration of Examination and Approval of the Overseas Investment Projects(《境外投资项目核准暂行管理办法》)” (“Order 21”). The new verification and registration (filing) regime, which will come into effect on 8 May 2014, will significantly simplify the approval process administered by NDRC and their competent local counterparts for overseas investment by Chinese enterprises.

Registration becomes the primary process

The most significant change introduced by Order 9 to the existing verification regime established under Order 21 is the establishment of registration regime as the primary regulatory process.

In comparison, verification is the sole regulatory procedure prescribed under Order 21, whereby all overseas investment projects by Chinese investors must be verified by NDRC or their competent provincial counterparts.

Order 9 only requires the following two types of projects to be verified:

  • “total investment amount” (explained below) exceeds US$ 1 billion; AND
  • projects involving “sensitive countries and regions” or “sensitive industries” (explained below)

(collectively “sensitive projects”).

Overseas investment projects not falling within those two categories are subject to registration.

The US$1 billion threshold has practical importance — on all the deals announced in the first half of 2013, only the acquisition of Nexen by CNOOC exceeded such threshold. Therefore, unless they are qualified as sensitive projects, most Chinese overseas investments will only need to go through registration process under Order 9.

Order 9 also for the first time clarifies the concept of “total investment amount” by Chinese investors, which refers to “the aggregated sum of money, securities, in kind contributions, intellectual property rights or technology, equity, debt and guaranteed amounts” provided by Chinese investors for their overseas investment. This clears the uncertainty on whether debt funding would constitute part of the total investment amount.

Under Order 9, “sensitive countries and regions” refers to countries and regions which China does not have diplomatic relationship with, or are under international sanction, or embroiled in ongoing war or riots. “Sensitive industries” means basic telecommunication operations, cross-border water resources development and utilization, large-scale land development, transmission lines, power grids, and news and media, etc. — such industries in target counties are also generally regarded as sensitive with different levels of foreign investment restrictions.

Common criteria apply to both verification and registration review processes

Verification and registration review processes are subject to the following common criteria under Order 9, which are not materially different from those under Order 21:

  • in compliance with national laws, regulations, industrial policies and overseas investment policies;
  • in compliance with the principles of win-win, mutual benefit and co-development, not endangering national sovereignty, security and public interest, and not in violation of international treaties to which China is a party;
  • in compliance with the relevant regulations on (foreign exchange) capital account items administration; and
  • investors having appropriate investment capability.

Thanks to those generic and ambiguous wording typically used in the PRC legislation, there is a strong argument that NDRC and its competent local counterparts still have discretion on whether an investment proposal should be verified or registered. Indeed, Order 9 does contemplate the possibility that NDRC does not verify or register overseas investment projects. Where verification is not obtained or registration is rejected, NDRC will notify the applicant the reasons in writing, and (theoretically speaking), the investor is entitled to an administrative appeal or launch an administrative action against NDRC for such decision.

Clear verification time frame

Verification procedure and time limit are clearly set out in Order 9.

For projects subject to verification, enterprises shall send their applications to NDRC’s provincial counterparts directly, rather than passing through different hierarchy of NDRC agencies. NDRC must, within five working days, notify the applicant if any supplementary documents are required.

Where an external assessment is needed for a project, the time of assessment is not included in the NDRC verification time limit, in which case NDRC must seek the assessment from external consultation institutions within five working days after accepting an application. In principle, assessment process shall not take more than forty working days and NDRC will bear the costs.

Simple registration process

The registration process prescribed under Order 9 is simple and straightforward:

  • projects undertaken by centrally-administered state-owned enterprises or exceeding USD 300 million are registered with NDRC in Beijing; and
  • all other projects are only required to be registered with NDRC’s provincial counterparts.

In addition, registration process will be conducted by submission of completed forms, which formality and supporting documentation requirements will be separately released by NDRC.

For projects subject to NDRC registration, the decision shall be made within seven working days while that for projects subject to NDRC verification shall generally be made in twenty working days (unless NDRC decides to extend such time limit in which case NDRC will have a further 10 working days to make the decision). Order 9 does not say anything on the corresponding time limits applicable to NDRC’s provincial counterparts which we expect will be clarified in the implementing regulations to be issued by such agencies.

NDRC is reported to have been developing a national online registration system for overseas investment, which is expected to be in operation in the second half this year. Under the online system, enterprises will be able to submit their applications and track the process.

Verification and registration must be undertaken prior to investment

Order 21 requests that Chinese investors obtain verification or registration proof from NDRC before signing any legally binding documents for their overseas projects. This regime is generally maintained under Order 9, with an additional option permitting Chinese investors to agree in their signed transaction documents that the obtaining of verification or registration confirmation from NDRC is the condition for the transaction documents to take effect.

It has been common market practice to accept the request by Chinese overseas investors that the grant of Chinese regulatory approvals (including amongst others, project verification by NDRC or its competent local counterparts) be a closing condition (instead of a condition for effectiveness). Whilst it is encouraging to see NDRC’s effort to bring its regulations more in line with the offshore transaction practice, the current drafting of Order 9 still does not accurately reflect the exact legal mechanism.

Change in scope of applicability

Order 9 is applicable to overseas investment projects by all forms of legal persons established in China (the so called “Investment Subjects” under the measures) by way of incorporation, merger and acquisition, equity participation, capital increase and capital injection, etc. It also regulates investment in overseas equity investment funds by way of equity participation or new establishment.

In respect of “overseas investment projects by natural persons and other investment entities”, Order 9 only says that “detailed implementation measures will be made by reference to this measures”, creating doubt as to the applicability of the new verification and registration regimes to non-legal person Chinese investors (such as natural persons or different types of funds in the form of limited partnership) prior to the promulgation of such detailed measures. On our past experience, overseas investments by Chinese private equity funds and sovereign wealth funds are generally regulated under the same verification regime applicable to all forms of legal person entities as established under Order 21.

Certain relaxation on re-investment by Chinese offshore investors

Quite contrary to popular perceptions, overseas investments by the offshore entities controlled by Chinese onshore investors (“re-investment”), including by way of incorporation, merger and acquisition, equity participation, capital increase and re-investment), are not exempted from the verification regime prescribed under Order 21. This means that for those major state-owned enterprise groups, notwithstanding their offshore subsidiaries may have already grown into very substantial local entities with major assets, their PRC onshore parents still have to go through verification procedure with the competent NDRC agencies for any re-investment by such offshore subsidiaries, irrespective of the fact whether such re-investment would involve transfer of funds in foreign exchange from China.

In comparison, Order 9 limits the verification or registration process to re-investment involving onshore parent financing or guarantee support to their offshore entities. Nonetheless, as onshore parent guarantee or financing are commonly seen in re-investment by Chinese offshore investors, it’d not be surprising if many re-investment projects still have to go through the onshore verification or registration procedures under Order 9.

Maintain project information reporting (road pass) regime

For investments over USD 100 million through competitive biddings or acquisitions, Order 21 requires Chinese bidders to submit a “project information report” to NDRC in Beijing applying for a confirmation letter before they are permitted to undertake any “substantive work”.

Order 9 materially maintains such regime, including the same definition of “substantive work” (i.e., signing binding documentation, making binding offers and commencing foreign investment review processes in the relevant jurisdictions of acquisitions, and making official bids for competitive tendering), and the same time limit for NDRC to issue the confirmation letter (i.e. within seven working days after acceptance of the project information report if the project is in compliance with the PRC outbound investment policy). The only significant change is to increase the previous USD 100 million triggering threshold to USD 300 million.

It has been the market’s common view that the preliminary information reporting regime is designed to avoid Chinese investors from competing against one another for the same assets at the ultimate cost to the Chinese State. Therefore, although NDRC has never expressly stated so, the market’s perception has been that NDRC will only issue one confirmation letter, which is commonly dubbed as “road pass”, at a time for any given deal. Interestingly, Order 9 is still silent on this obvious position.

In light of what happened to recent deals (please refer to our client alert, “Relaxation of NDRC rules has immediate impact, but uncertainty remains if there is only ever one anointed Chinese bidder), it appears that NDRC is likely to adopt a more stringent “one road pass” policy under the new regime, in particular on those mega China outbound transactions.

Noticeably, Order 9 says that where any investor shall submit a project information report but fail to obtain a confirmation letter before undertaking any substantive work, NDRC shall criticise it in a circular and order it to make a rectification; where such violations are serious and may cause substantial damage to the interests of the State, NDRC shall coordinate with relevant departments to impose a penalty on that enterprise in accordance with laws, and submit or refer the case to the competent authorities to investigate their legal and administrative responsibilities. It no doubt remains to be tested how such accountability regime operates in practice, in particular where those “violating” investors are not SOEs.

Breakthrough in payment of preliminary transaction costs

If Chinese investors need to make payment in foreign exchange during the preliminary phase of their transactions (including payment for performance bond and letter of guarantee, etc.), Order 21 permits them to apply to NDRC for approvals. The approved preliminary-phase costs will be counted towards the project’s total investment amount. The subsequent foreign exchange regulations provide that, such preliminary-phase payment shall not exceed 15% of the total investment amount. In practice, the local SAFE branches generally take a very conservative approach, requiring the relevant enterprises to obtain project verification from NDRC first before commencing the SAFE process, and often substantially restricting the approved foreign exchange amount.

Order 9 takes a more liberal approach on this. Where an outbound investment project involves a long period of preliminary phase and a large amount of preliminary costs (including performance bond, charges of letter of guarantee, consulting fees, resource exploration fees, etc.), the investor can undertake a separate verification or registration procure specifically for the required preliminary-phase costs. The verified or registered preliminary-phase costs will equally be counted towards the project’s total investment amount.

It is not entirely clear how this new regime operates. We expect SAFE to issue implementation rules soon.

Validity of verification and registration confirmations and subsequent changes

According to Order 9, the verification document and registration notice shall state a valid term, which shall be two years for verification and registration concerning construction projects and one year for other projects.

If investors are not able to complete the relevant formalities of foreign exchange, customs, entry and exit administration and tax, they may apply for an extension within thirty working days before the expiry date.

Investors are required to re-apply to NDRC for the alteration of the verified or registered projects under one of the following circumstances:

ž change of the project scale and key terms;

ž the alteration of the investors or their equity structure; and

ž the Chinese party’s total investment is in excess of 20% or more of the verified or registered amount.

Non-compliance with verification or registration obligations

An interesting point to note is that in comparison with Order 21, Order 9, at least on the face of the regulations, has strengthened the accountability regime for non-compliance of the order.

NDRC will not handle, give verification or accept registration if investors violate the laws and regulations, conceal relevant facts or provide false information in the reporting process. For those who have already obtained verification documents or registration notifications, NDRC has the power to revoke them and issue warning letters.

If any parties fail to obtain verification or registration in accordance with the laws and regulations, or implement projects inconsistently with what is verified/registered, NDRC and the relevant departments can order to stop the projects and bring parties involved to the relevant bodies for investigation of their legal and administrative responsibilities.

Order 9 stresses that the relevant departments must not handle any procedures for, and importantly, financial institutions must not grant loan to, projects not verified/registered according to specified procedures and authorities.


Order 9 introduces registration as the primary regulatory process for Chinese overseas investment. It also decentralises the approval powers from NDRC and significantly simplifies the China outbound regulatory procedures. These positive steps will facilitate overseas investment carried out by Chinese investors by reducing the tensions between onshore regulatory process and offshore transaction timeline, and the uncertainty brought by onshore regulatory process to offshore transactions.

Yet, the “project information reporting” (“road pass”) regime is still not abolished for projects exceeding USD 300 million. Re-investment by overseas subsidiaries of Chinese onshore parents is not exempted from the onshore regulatory process either. Arguably, NDRC and its competent local counterparts still have discretions on both verification and registration outcomes. So it is probably too early to welcome an “overhaul” by NDRC of the existing China outbound regulatory approval regime. The incomplete reform will not categorically eliminate the uncertainty which the NDRC regulatory process may bring to Chinese outbound transactions (particularly in the context of competitive bidding). Therefore, Chinese investors should not lightly give away their normal practice in seeking to have the grant of those regulatory verifications or registrations as a closing condition to their outbound transactions.