NDRC pushes for more power over investment approvals

In 2008, the NDRC released Notice 1773, which stated that it should approve FIE reinvestment. The draft Measures seek to formalise the Notice, but have failed to give clear guidance on which types of projects require approval.

The draft is also unclear on how the Commission will oversee foreign-invested partnership (FIP) approvals. FIPs are becoming a popular investment vehicle because of the ease of incorporation and the minimal approvals required, compared with joint ventures and wholly foreign-owned enterprises.

The draft could mean that that the incorporation of a FIP is now subject to NDRC approval. However, this goes against the nature of the FIP structure. It could also mean that when a FIP invests in certain projects using PE funds, approval is necessary.

“The NDRC's role should be that when FIPs invest in specific projects that are subject to government approval, the NDRC will review and approve it. Normally when the FIP, say, a private equity fund is set up, the NDRC should not be concerned with it until the FIP starts to invest in specific projects,” commented Sun.

Approval thresholds

Foreign investments over US$500 million are subject to NDRC approval under the draft Measures. Previously, the State Council approved these projects. In addition, local Development and Reform Commissions (DRCs) can approve encouraged or permitted projects with investments under US$300 million.

The threshold for DRCs is an increase of US$200 million from the Tentative Measures. However, the move also reflects Notice 917 from 2010, which stated that DRCs should have the right to approve projects under US$300 million. Similarly to FIE reinvestment, the Measures are formalising the Notice.

“The current approval hierarchy in the draft corresponds to MOFCOM's approval hierarchy, generally speaking. In the past, there was a mismatch as, for example, projects falling within the approval ambit of local MOFCOM may have to be submitted to central NDRC for approval. The draft makes this clearer and this will be a good move for foreign investors,” said Sun.

Sustainable development

The Measures also promote sustainable development and energy conservation. The government has been pushing these objectives by offering incentives for foreign investors who use green energy. The draft shows the NDRC's determination to incorporate this direction into approvals.

When submitting an application, foreign investors must now include an exploration and resources plan, and an energy saving plan. “China has become more careful in reviewing foreign investment and is paying attention to the quality of the investment. The NDRC could put a lot of weight on these plans in theory,” noted Sun.

The sustainable development and energy conversation provision creates new opportunities for consulting businesses. Foreign investors will be looking to experts to ensure their plans are in line with government policies.

M&A transactions

The Measures also affect mergers and acquisitions of domestic enterprises. When the production capability and investment amount of the target company is not increased, the application report to the NDRC is simplified.

This is a logical move because when the size of the business remains unchanged, there is no need to file detailed reports. MOFCOM's approval process for domestic targets is already quite strict, so this move by the NDRC offers some relief to foreign investors.

By David Tring

Further reading:

Administration of the Verification of Foreign-invested Projects Tentative Procedures (外商投资项目核准暂行管理办法)

Foreign-invested partnerships: A new vehicle for investments?

Foreign Industrial Investment Guidance Catalogue (外商投资产业指导目录)