Regulatory Policy Analysis on Certain Foreign Debt Issuance

(This article was written by Tezhi Ling and Linhong Du of Jingtian & Gongcheng)

(This article was first published on China Business Law Journal column"Banking & Finance", authorised reprint)

On 14 September 2015, the National Development and Reform Commission (the “NDRC”) issued the Notice on Promoting Reform of the Administration of the Recordal and Registration System for the Foreign Issuance of Debt by Enterprises (the “Notice”). After the issuance of the Notice, China’s foreign debt administration changed from the approval system to the total quantity control recordal system. During the last few years, the scale of foreign debt has been increasing year on year.

Chinese enterprises currently employ three principal models to issue offshore bonds: (1) direct issuance by a domestic enterprise, namely, a domestic enterprise issue the offshore bonds directly; (2) indirect issuance by a domestic enterprise, namely, an offshore subsidiary of a domestic enterprise issues the bonds, usually with the guarantee or other means of credit enhancement provided by the domestic enterprise; or (3) issuance of offshore bonds by a small red chip enterprise, which is a special type of “foreign debt issuance by a Chinese enterprise”. 

The reason that the foreign issuance of debt by a small chip enterprise is a special type of “foreign debt issuance by a Chinese enterprise” is that, from the perspective of the literal meaning of the words, the entities that the Notice regulates are “domestic enterprises and the offshore enterprises or branches controlled by them”. Accordingly, when the Notice was initially issued, those in the industry generally did not consider the foreign issuance of debt by small red chip enterprises falling within the scope of the Notice’s regulation.

However, soon after the issuance of the Notice, it was learnt that the NDRC held a different view regarding the “foreign debt issuance by a Chinese enterprise”, which was that the NDRC required the “foreign debt issuance by a Chinese enterprise” to complete the pre-issuance filing with the NDRC in accordance with the Notice. As there was never any clear basis for expanding the explanatory criteria, certain small red chips with a willingness to take a chance offered offshore bonds without completing the pre-issuance filing with the NDRC. This continued until June 2017 when the Risk Warnings for the Offshore Offering of Foreign Bonds by Enterprises issued by the NDRC chimed the hour, naming five relevant enterprises (which included small red chip enterprises) for failing to carry out prior recordal/registration before issuing foreign debt, and warned that the enterprises shall complete the pre-issuance filing with the NDRC, and after the issuance, they were also required to timely submit issuance information.

In May, 2018, the Department of Foreign Capital and Overseas Investment of the NDRC also called eight issuers of foreign debt and such intermediary firms as underwriters, law firms, etc. in for talks and published the details thereof on its official website, pointing out the violations of regulations committed by the enterprises in their foreign issuance of debt and demanding that the enterprises and intermediary firms comply with the prior recordal/registration requirements of the Notice and regulations on the foreign issuance of debt. It stated that it would more stringently hold relevant enterprises and intermediary firms that fail to carry out the prior recordal/registration procedures or commit other violations of regulations accountable in subsequent foreign issuance of debt and, depending on the seriousness thereof, would place them on the blacklist for the relevant sector and add them to the national trustworthiness information sharing platform, promptly circulate the same publicly and restrict the relevant responsible entities from applying for a new or participating in foreign debt recordal/registration.

From the 2017 criticism by name to the talks in 2018, the NDRC’s attitude toward the foreign issuance of debt by small red chip enterprises progressively became clearer, i.e. small red chip enterprises needed to be incorporated into the scope of regulation of the Notice.

However, the term “small red chip enterprise” is not strictly and clearly defined in law, pursuant to the Notice of the General Office of the State Council Forwarding the Several Opinions of the China Securities Regulatory Commission on Launching a Pilot Project for the Domestic Offering of Stocks and Depository Receipts by Innovative Enterprises, the term “red chip enterprise” means an enterprise that is registered abroad but whose main business activities are carried on in China. In practice, it is generally agreed that “small red chip enterprise” refers to an enterprise that is registered abroad, whose main business activities are carried on in China and whose actual controller is a domestic natural person (including domestic natural persons who subsequently immigrate abroad). 

In past projects, intermediary firms could arrive at different criteria when determining whether the enterprise shall complete the pre-issuance filing with the NDRC based on their own experience and their communications with the regulators: 

1. Criterion of main place of business activities. If an enterprise’s main place of business activities is located outside of China (with the common understanding that its offshore assets and revenues account for at least 50 percent), then the carrying out of pre-issuance filing with the NDRC is not required, even if the actual controller is a domestic natural person. 

2. Criterion of the status of the actual controller. If the actual controller has foreign status and such status was not acquired for the purpose of listing, a “small red chip enterprise” is not constituted and pre-issuance filing with the NDRC is generally not required. Additionally, there are certain other separate situations, e.g. the enterprise is a small red chip enterprise at the time of listing, but the enterprise no longer has an actual controller or there has been a change in the actual controller. 

According to the NDRC’s Regulatory ideas, the NDRC might consider comprehensively whether the business revenue, the payment source of the debt and the business operation entities are in China when determining the requirement of pre-issuance filing with the NDRC. Under the current situation where regulation is growing increasingly strict, and until the NDRC or a relevant authority issues further relevant explanatory criteria for “offshore enterprise controlled by a domestic enterprise” or “small red chip enterprise”, if an enterprise is uncertain as to whether it is required to carry out prior recordal in accordance with state regulations, we would recommend that the opinion of the development and reform commission first be sought and that the enterprise not simply just take a chance. In the subsequent debt issuance project, the intermediary firms must also be more prudent as to whether pre-issuance filing with the NDRC is required for such project.

作者介绍

   凌特志    

合伙人

010-5809 1279

[e-mail]

凌特志律师为竞天公诚合伙人之一，于2007年加入竞天公诚，在此之前，其在北京市通商律师事务所执业多年，具有丰富的法律服务经验。

凌律师的主要业务领域是境内外证券发行与上市、私募股权融资、重组、并购及其他公司法律业务，涉及的行业包括TMT、教育、医疗、金融、高科技、能源、运输、房地产、制造业等。

在股票发行与上市领域，凌律师曾为二十多家企业的境外红筹、H股、A股的发行和上市工作提供法律服务。

在债券发行与上市领域，凌律师曾为数十家企业的境内外债券、优先股、永续债和其他债券品种的发行和上市工作提供法律服务。

在私募股权融资、并购领域，凌律师曾经代表境内外公司在中国境内进行重组、并购、私募融资，所提供的法律服务包括开展尽职调查、交易结构设计、参加商务谈判、起草与修改法律文件、提供法律意见等。

凌律师毕业于对外经济贸易大学，获法学硕士学位，并拥有中华人民共和国律师执业资格。

凌特志律师历史文章

   杜林红   

合伙人

010-5809 1056

[e-mail]

杜林红律师毕业于中国政法大学，获得法学硕士学位。

杜律师于2010年加入竞天公诚，现为竞天公诚合伙人。

杜律师的主要业务领域包括境内外证券发行、私募股权融资、重组并购、外商投资及其他公司法律业务等，涉及的行业包括银行金融业、房地产、医疗行业、互联网行业、教育行业等。在证券发行和资本市场领域，杜律师曾为多家知名企业的境外股票、债券的发行与上市、投资并购等提供法律服务。 

杜律师的工作语言为中文和英文。

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