NDRC draft eases outbound regulatory approvals

“Compared with before, the NDRC has taken up more of a functional rather than a gatekeeping role,” said Guanchun Dai, an M&A and capital markets partner at Jingtian & Gongcheng in Beijing. “The NDRC used to be very strict about approving outbound deals and wanted to know every detail about the proposed project.”

The NDRC has relaxed its approach through the years, he said, adding that the regulator doesn't ask too many questions unless the deals are complicated, such as those involving complex financing vehicles and structures, or targets that are Cayman Islands or BVI holding companies.

Total Chinese outbound M&A hit $83.9 billion from 84 deals in Q1 2016, a record value figure for the country logged for a single quarter, according to a Baker & McKenzie cross-border M&A index.

Deal certainty perspectives

The new, simplified process could give foreign sellers added reassurance for deal closure, said Li. That said, there could still be uncertainty with the need for acknowledgement as PRC regulatory filing and verification can still be a condition precedent to the successful execution of a transaction, she said.

Many foreign counterparties aren't familiar with the NDRC's attitude and handling of this procedure, but the Draft sends out a positive signal that the authorities are supporting outbound investments, reducing conditional uncertainty on deals and giving more power to investors, Li added.

The Draft also cancels the need to submit a letter of intent issued by banks in the application, and removes the provincial-level NDRC review process. Local bureaus no longer need to submit their own opinions to the central NDRC, and instead must pass companies' filed reports directly to the central body.

Practitioners noted that the previous move to allocate verifying duties to the lower level departments actually caused more delay. Some of the provincial NDRCs lacked familiarity with the rules and procedures and took more time to be extra careful, and would regularly consult with the central NDRC anyway, Dai explained.

Competitors unleashed

A King & Wood Mallesons blog highlights that the wording of the NDRC issuing a “confirmation letter” within seven business days of receiving the project information report has subtly been changed to an “acknowledgement letter” in the Draft.

It was informally understood that the NDRC would issue a confirmation to only one Chinese bidder for each deal, in order to prevent domestic companies from competing against each other and driving up prices at the cost of the state.

The move towards granting multiple letters of “acknowledgement” instead has reportedly already been seen in practice.

“That is indeed the word on the street,” said Li. “The PRC authorities appear to have taken a step back as they realize that regulatory processes can, whether real or not, significantly affect the competitiveness of Chinese bidders.”

In 2012, China's largest construction equipment manufacturers Sany Group and Zoomlion both applied for the acquisition of German concrete pump maker Putzmeister. Sany had the NDA and preliminary agreement signed earlier, and was ultimately given the go ahead by the NDRC, even though Zoomlion had submitted its information report first.

Some Chinese companies have also used overseas entities to bypass approval, said Dai.

The King & Wood Mallesons post points to an example: In 2014, Tsinghua Unigroup, which was competing against Shanghai Pudong Science and Technology Investment (PDSTI) for NASDAQ-listed RDA Microelectronics, successfully avoided the NDRC verification requirements by funding the deal through offshore financing facilities.

“The transaction is a telling case demonstrating that in an increasingly market-driven and competitive economic environment, it is also increasingly difficult for the regulators to try to interfere with the intrinsic market mechanism using administrative measures,” the report said.

Capital controls and deal flow

But despite the deregulation efforts, the depreciation of China's currency will make obtaining outbound investment clearance quite challenging in practice, Dai said.

“2015 was the best year,” he said. “I worked on 20 outbound deals which were all verified quickly. But it has been tougher to convert the renminbi to foreign exchange this year and approval has actually taken longer—I expect it will take from six to 12 months.”

Although the NDRC and MOFCOM's long-term intentions are to ease control and move towards minimal approval requirements, in the short run, the regulators are under pressure to monitor the amount of money leaving the country so as to avoid exacerbating both currency depreciation and outflow concerns.

“I've spoken with Shanghai officials who say that even though they can finish approvals within one week they have to take their time to process applications as the priority is to control capital outflow,“ said Dai.

By Katherine Jo

China has taken a major step to ease outbound investment controls, doing away with value-based requirements and scrapping the need for regulatory approval in most cases.

The Decision on Amending the «Measures for the Administration of the Check and Approval and Record Filing of Overseas Investment Projects» (Draft for Public Comments) (Draft), issued by the National Development and Reform Commission on April 13, 2016, leaves only those considered 'sensitive' to be formally signed off. All outbound investments are now subject to record filing only.

“The most critical change is the abolishment of thresholds for State Council approval,” said Ling Li, corporate partner at Allen & Overy in Beijing. “According to the Draft, the buck stops with the NDRC for all projects.”

The Measures for the Administration of Approval and Filing of Outbound Investment Projects (2014 Measures) that came into effect on May 8, 2014 are the rules under revision. Overriding the previous approval-only regime, the 2014 Measures first introduced the record filing process for outbound investments worth less than $1 billion. Deals above this mark required NDRC approval, and those above $2 billion required higher-level clearance from the State Council. These excluded transactions involving projects, industries, countries, or regions deemed “sensitive” by the NDRC, which passed its decision to the State Council as well.

“Compared with before, the NDRC has taken up more of a functional rather than a gatekeeping role,” said Guanchun Dai, an M&A and capital markets partner at Jingtian & Gongcheng in Beijing. “The NDRC used to be very strict about approving outbound deals and wanted to know every detail about the proposed project.”

The NDRC has relaxed its approach through the years, he said, adding that the regulator doesn't ask too many questions unless the deals are complicated, such as those involving complex financing vehicles and structures, or targets that are Cayman Islands or BVI holding companies.

Total Chinese outbound M&A hit $83.9 billion from 84 deals in Q1 2016, a record value figure for the country logged for a single quarter, according to a Baker & McKenzie cross-border M&A index.

Deal certainty perspectives

The new, simplified process could give foreign sellers added reassurance for deal closure, said Li. That said, there could still be uncertainty with the need for acknowledgement as PRC regulatory filing and verification can still be a condition precedent to the successful execution of a transaction, she said.

Many foreign counterparties aren't familiar with the NDRC's attitude and handling of this procedure, but the Draft sends out a positive signal that the authorities are supporting outbound investments, reducing conditional uncertainty on deals and giving more power to investors, Li added.

The Draft also cancels the need to submit a letter of intent issued by banks in the application, and removes the provincial-level NDRC review process. Local bureaus no longer need to submit their own opinions to the central NDRC, and instead must pass companies' filed reports directly to the central body.

Practitioners noted that the previous move to allocate verifying duties to the lower level departments actually caused more delay. Some of the provincial NDRCs lacked familiarity with the rules and procedures and took more time to be extra careful, and would regularly consult with the central NDRC anyway, Dai explained.

Competitors unleashed

A King & Wood Mallesons blog highlights that the wording of the NDRC issuing a “confirmation letter” within seven business days of receiving the project information report has subtly been changed to an “acknowledgement letter” in the Draft.

It was informally understood that the NDRC would issue a confirmation to only one Chinese bidder for each deal, in order to prevent domestic companies from competing against each other and driving up prices at the cost of the state.

The move towards granting multiple letters of “acknowledgement” instead has reportedly already been seen in practice.

“That is indeed the word on the street,” said Li. “The PRC authorities appear to have taken a step back as they realize that regulatory processes can, whether real or not, significantly affect the competitiveness of Chinese bidders.”

In 2012, China's largest construction equipment manufacturers Sany Group and Zoomlion both applied for the acquisition of German concrete pump maker Putzmeister. Sany had the NDA and preliminary agreement signed earlier, and was ultimately given the go ahead by the NDRC, even though Zoomlion had submitted its information report first.

Some Chinese companies have also used overseas entities to bypass approval, said Dai.

The King & Wood Mallesons post points to an example: In 2014, Tsinghua Unigroup, which was competing against Shanghai Pudong Science and Technology Investment (PDSTI) for NASDAQ-listed RDA Microelectronics, successfully avoided the NDRC verification requirements by funding the deal through offshore financing facilities.

“The transaction is a telling case demonstrating that in an increasingly market-driven and competitive economic environment, it is also increasingly difficult for the regulators to try to interfere with the intrinsic market mechanism using administrative measures,” the report said.

Capital controls and deal flow

But despite the deregulation efforts, the depreciation of China's currency will make obtaining outbound investment clearance quite challenging in practice, Dai said.

“2015 was the best year,” he said. “I worked on 20 outbound deals which were all verified quickly. But it has been tougher to convert the renminbi to foreign exchange this year and approval has actually taken longer—I expect it will take from six to 12 months.”

Although the NDRC and MOFCOM's long-term intentions are to ease control and move towards minimal approval requirements, in the short run, the regulators are under pressure to monitor the amount of money leaving the country so as to avoid exacerbating both currency depreciation and outflow concerns.

“I've spoken with Shanghai officials who say that even though they can finish approvals within one week they have to take their time to process applications as the priority is to control capital outflow,“ said Dai.

By Katherine Jo