NDRC approval function reactivated in foreign invested projects and M&A transactions

The National Development and Reform Commission (“NDRC”) issued the Notice on Further Reinforcement and Rectification of Foreign Investment Projects Administration (the “Notice”) on 8 July 2008, in order to reinforce the nationwide implementation of the Interim Measures on Administration of Approval for Foreign Investment Projects (“Measures”). Foreign investors should closely follow the Notice and other related rules to ensure a smooth investment process in China. According to the Notice and Measures, every M&A transaction in China has to obtain the approval from the NDRC or its local counterparts.

Why the Notice

The Measures were promulgated on 9 October 2004 and became effective on the same day. According to the Measures, all foreign investment projects shall be subject to the approval of NDRC or its local counterparts before relevant establishment approval formality may be handled. However, in practice, the Measures were not effectively implemented at local level, which facilitated inflow of foreign exchanges into China (for example, foreign investors could easily remit foreign exchange into China and use it for other purposes than their approved business scope or investment).

Main highlights of the notice

A must for approval

The Notice reiterates that all foreign investment projects (including but not limited to foreign invested enterprises, acquisition of Chinese enterprise by foreign investors, capital increase and investment by the subsidiary of foreign-invested enterprises) are subject to the approval of NDRC or its local counterparts, prior to any relevant establishment approval formality with the Ministry of Commerce (“MOFCOM”) or its local counterparts.

Strict examination on authenticity

The Notice foresees a strict examination procedure, in particular of the background and credibility status of the foreign investors, in order to avoid non-tangible investment related inflow of foreign exchange.

Total investment amount

The Notice requires local counterparts of NDRC at all levels to examine and approve the total investment amount according to the project scale and main activities. NDRC or its local counterparts are allowed to have a foreign investment project assessed to determine the total investment amount.

Approval purview

The Notice emphasises the approval purview of NDRC at different levels, i.e. projects, whose total investment amount is no less than USD100 million and for which foreign investment is encouraged or permitted, or whose total investment amount is no less than USD50 million and for which foreign investment is restricted, are subject to the approval of NDRC; in all other cases, investment projects must be subject to the approval of NDRC’s local counterparts.

Satisfaction of requirements for approval

The Notice emphasises that all the requirements stipulated in both the Measures and other relevant rules (for example, those relating to approvals for land use right, address selection, environment, etc.) must be satisfied by the applicant in order to obtain the approval. Projects, which may cause serious pollution or are high in energy, material or resource consumption, are strictly restricted.

Supervision of approved projects

The Notice requires for strict supervision of approved projects.
In addition, the Notice requires NDRC and its local counterparts to coordinate closely with other relevant authorities such as MOFCOM, environmental protection bureau, foreign exchange administration, and taxation bureau. This will facilitate the establishment process of foreign investment projects on the one hand and enhance overall supervision of foreign investment activities on the other hand.

Impact of the Notice

Following the issue of the Notice, all foreign investment projects (regardless their scale or business activity) are subject to the approval of NDRC or its local counterparts, prior to approval of their foreign investment activities by MOFCOM or its local counterparts.

However, NDRC at provincial levels are allowed to empower their counterparts at city level (or district level) to exercise such power of approval (provided that projects, for which foreign investment is restricted, must be approved by NDRC at provincial level) and enact local approval procedure rules. For example, according to Beijing local rules, foreign investment projects, whose total investment amount is less than USD30 million, are subject to the approval of NDRC’s counterparts at district level.

NDRC or its local counterparts shall decide whether to grant an approval or not within 20 working days upon receiving all required documents. The deadline may be extended if necessary. In practice, such time limit is usually extended beyond the 20 working days period.