Handing down authority for foreign investment

April 16, 2009 | BY

clpstaff &clp articles &

Two new sets of guidelines will further streamline the process for approval of foreign investments, but some additional restrictions have been added. By Jonathan Z Zhou, Jessica Xu and Kevin Troy, Fangda Partners.

On March 5 and 6 2009, the Ministry of Commerce (Mofcom) issued two circulars which further delegate approval authority for foreign investment to provincial and quasi-provincial authorities. Taken together, the Circular on Further Improving the Examination and Approval of Foreign Investment (March 5 Notice) (关于进一步改进外商投资审批工作的通知) and the Circular on Delegating to Lower-level authorities the Authority to Examine and Approve the Investment in, and Establishment of, Companies with an Investment Nature by Foreign Investors (March 6 Notice) (关于下放外商投资举办投资性公司审批权限的通知) have the cumulative effect of significantly reducing the control of the central government on foreign investment.


Delegating FIE Approval Rights

(1) Approval for newly-established foreign-invested enterprises (FIEs), including companies limited by shares (or translated to joint stock companies), which fall into the Encouraged Category and do not require the state's assistance in balancing foreign exchange, is no longer reserved to Mofcom and is instead delegated to provincial approving authorities, irrespective of the total investment amount – the aggregate of the registered capital and the borrowing capacity of an FIE approved by the approving authority – of such FIEs. Approval of Encouraged Category FIEs with a total investment of more than US$100 million was previously reserved as a power of Mofcom. Approval for any subsequent capital increase or amendment to the joint venture contract/articles of association of the FIEs described above is delegated to provincial approving authorities as well. In addition, the delegation is also expanded to any subsequent changes with respect to those FIEs which were previously approved by Mofcom except for (i) any capital increase that requires the approval of the National Development and Reform Commission (NDRC); and (ii) any transfer of a controlling interest from a Chinese party to a foreign party.

It is to be noted that:

• approval for the establishment of those FIEs that require State Council approval has not been delegated to provincial approving authorities;

• on a positive note, the formation of foreign-invested companies limited by shares falling into the Encouraged Category has been further delegated to provincial approving authorities for approval. In a Mofcom circular issued on August 11 2008 (Circular 50: Notice on Delegating the Approval Concerning Establishment and Changes of Foreign Investment Companies Limited by Shares (关于下放外商投资股份公司、企业变更、审批事项的通知)), only the approval on formation of foreign-invested companies limited by shares whose total investment, or net asset value in the case of conversion from an existing FIE, is below US$100 million (for companies in the Encouraged and Permitted Categories) or US$50 million (for companies in the Restricted Category) was delegated to provincial authorities. The further delegation may help expedite the process for an FIE to list in China or Hong Kong since only a company limited by shares is eligible for public offering and listing of its shares under the PRC Company Law (中华人民共和国公司法); and

• though not expressly stated, the context of the March 5 Notice indicates that, with respect to those FIEs whose establishment and capital increase require central NDRC approvals, their establishment and capital increase shall only require the approval of provincial approving authorities except for those FIEs which were originally approved by Mofcom.


(2) Certain approval powers of FIEs in the automobile industry are delegated to local approving authorities, which include approval for any capital increase of (i) the FIEs engaged in the manufacturing of cars, automobiles for agricultural use and engines used in automobiles, the purpose of which is to enlarge the production capacity of products of the same category and diversify their products (including establishing production units of products of the same category without independent legal person status in different places); (ii) the FIEs engaged in the manufacturing of motorcycles, with the purpose of enlarging the production capacity of motorcycles and their engines; and (iii) FIEs engaged in the manufacturing of spare parts of cars, automobiles for agricultural use and motorcycles, with the purpose of enlarging production capacity of spare parts. The approval powers with respect to the establishment of new FIEs engaged in the manufacturing of motorcycles or the spare parts of cars, automobiles for agricultural use and motorcycles, are also delegated to local approving authorities.

According to Clause 3 of the March 5 Notice, the approval of certain types of FIEs in the automobile industry is delegated to local approval authorities irrespective of the size of the total investment. It remains unclear whether those projects which are beyond Mofcom's approval authority shall, after receiving approval of State Council, still be reserved to Mofcom for approval or have been delegated to local authorities for approval as well.


(3) Approval for the establishment of new foreign investment holding companies with registered capital of less than US$100 million and any subsequent changes of such holding companies, except for any single capital increase of more than US$100 million, is delegated to provincial approving authorities, which approval authority shall not be further delegated by provincial approving authorities. In addition, approval of any subsequent changes (such as capital increase, amendment to the joint venture contract and articles of association) to the holding companies approved by Mofcom, except for any single capital increase of more than US$100 million or change of investors, has been delegated to provincial approving authorities.

It should be noted that Clause 6 of the March 6 Notice specifies that the investment scope of foreign investment holding companies should not involve any industries which are restricted or prohibited for foreign investment or which fall within the set of industries subject to state macro-economic control (such as real estate and steel). This indicates a new restriction on the investment scope of a foreign investment holding company – industries under macro-economic control. Foreign investment holding companies are theoretically still permitted to invest in industries under macro-economic control, subject to the requisite approval of NDRC and Mofcom and as long as such industries are not in the Restricted or Prohibited Categories.


Approval Threshold for Foreign Acquisitions

Approvals of foreign acquisition deals, including any merger with or acquisition of domestic enterprises by foreign investors (as defined under the 2006 Administration Rules on Merger with and Acquisition of Domestic Enterprises by Foreign Investors) whose transaction amounts are less than US$100 million if falling into the Encouraged Category or the Permitted Category, or less than US$50 million if falling into the Restricted Category, are delegated to local approving authorities.


It should be noted that:

• originally the approval threshold was based on the total investment of the target companies. In practice during recent months, Mofcom has already been applying the transaction amount as a parameter of the approval threshold. The current regulation recognises such practice in writing. The replacement of the parameter from total investment to transaction amount actually will help those minority deals at a lower transaction amount avoid a lengthy and time-consuming approval process at the central government level;

• according to the Mofcom's regulation on foreign acquisitions published in August 2006, all foreign acquisitions may only be approved by the provincial approving authorities without any further delegation. However, Clause 5 of the March 5 Notice only refers to the local authorities instead of provincial authorities. It still needs to be further confirmed whether this implies that the approval of foreign acquisition transactions can be further delegated to the lower-level local approving authorities by the provincial approving authorities;

• Clause 6 of the March 5 Notice provides that any acquisition of shares in a domestic listed company by foreign investors shall still be subject to the Mofcom regulation on foreign strategic investment in listed companies and that an approval from Mofcom would still be required; and

• the delegation of approval rights will have no impact on any other governmental approval procedures, such as approval from the State Asset Supervision and Administration Commission if any state asset is involved in the transaction, or an anti-trust review should the relevant reporting thresholds be triggered.


Special Regulations Shall Prevail

Clause 6 of the March 5 Notice provides that, in the case of any regulation with respect to the foreign investment in a specific industry, specific industry policies or industries under macro-economic controls, such existing regulations shall still be followed unless the approval powers are expressly delegated by Mofcom to provincial authorities.

Mofcom has recently specifically delegated the approval powers with respect to the FIEs in the sectors of commercial enterprises (companies in the retail, wholesale and other trading sectors) and foreign investment venture capital investment enterprises (FIVCIEs) to provincial approving authorities.


Removal of Certain Approval Items

According to the March 5 Notice, approval with respect to the early release of the supervision of equipment imported by FIEs as well as the establishment domestic branch companies is no longer required. If an FIE intends to establish any branch within the PRC, it is only required to file with the local commerce authorities where such FIE is registered unless a special approval is required under certain specific regulations, for example if it is a regulated entity in the financial service industry, such as banking, securities or insurance.


Clarification of the Local Approval Authorities

Under the March 5 Notice and March 6 Notice, the provincial approving authorities are defined to include the commercial administration authorities of the cities specifically designated in the state plan and ten sub-provincial cities (including Harbin, Changchun, Shenyang, Jinan, Nanjing, Hangzhou, Guangzhou, Wuhan, Chengdu and Xi'an). In the meantime, the Economic and Technology Development Zone at the state level shall have approving powers equivalent to those that have been delegated by Mofcom to the provincial approving authority. This is in line with the previous practice that the commercial administration authorities of the cities specifically designated in the state plan, sub-provincial cities and the Economic and Technology Development Zone at the state level have been exercising the same approval rights as the provincial authorities.



Smaller deals delegated, larger ones under the microscope

Mofcom's latest guidelines are part of a bigger strategy, driven by a State Council Notice issued in 2007 (Decision on Abolishing or Adjusting a Fourth Batch of Items Subject to Administrative Examination and Approval).

Near the end of last year, the Ministry issued two other Circulars which allow lower-level authorities to approve certain investments made by foreign enterprises.

Unless the foreign M&A deals exceed US$100 million for encouraged projects, or US$50 million in “restricted” projects, foreign investors need not apply to Mofcom for approval – they can go directly to local authorities. This should speed up many approvals and make life considerably simpler.

Local agencies will also be conscious of the need to keep the central authorities happy while also trying to attract foreign investors. This should lead to more competition and more streamlined local procedures.

There are drawbacks, though. Although the complexity of getting approvals will be decreased vertically, it will increase “horizontally”, as there will be substantial variation as to what is requested from different agencies.

Delegation will have another important effect on the top-level agencies such as Mofcom – it will free up precious resources. Until 2008's Circulars were issued, Mofcom had to deal with many different issues, and there had been complaints about the time taken to issue approvals. The Ministry will now have more time and manpower to scrutinise bigger deals and deal with strategic issues, which include decision related to anti-competitive behaviour.

The move to delegate may lead to faster approvals for everyday transactions, but for those attempting landmark deals or acquisitions which will trigger examination on anti-monopoly grounds, things may get a little tougher.

Phil Taylor


This premium content is reserved for
China Law & Practice Subscribers.

  • A database of over 3,000 essential documents including key PRC legislation translated into English
  • A choice of newsletters to alert you to changes affecting your business including sector specific updates
  • Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
For enterprise-wide or corporate enquiries, please contact our experienced Sales Professionals at +44 (0)203 868 7546 or [email protected]