China proposes new measures for foreign investors’ strategic investments in listed companies
The Chinese Ministry of Commerce (‘‘MOC’’) released on 30 July 2018 a draft on the amended Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies (the ‘‘Draft’’), which aims at further opening the Chinese market to foreign investors. The Draft is set to revise the existing laws and regulations (the ‘‘Existing Measures’’), in effect since 30 January 2006, and proposes looser restrictions on strategic foreign investments into Chinese listed companies, in line with the new regulatory regime and China’s economic development strategies.
Over the past few years, the Central Government has implemented various measures to streamline governmental approval process on foreign investments in China’s strategic sectors in order to enhance market entry and attract foreign capitals.
Masson de Morfontaine analyses below the key provisions of the Draft.
- Simplified approval and filing system
Under the Draft, strategic investments which do not fall under the ‘’Negative List’’ (which restricts certain types of foreign investments) will not require MOC approval and will only be subject to a simplified online filing process.
On the other hand, restricted foreign investments (i.e. investments in industries subject to special administrative measures) will still require administrative approval from MOC (or the provincial-level authority depending on the investment amount and targeted industry).
This provision is in line with the existing Provisional Measures on the Administration of Filings for Establishment and Change of Foreign-Invested Enterprise, which took effect since 2016.
- Lower qualification requirements and increased flexibility
- Investment by qualified individuals allowed
Under the Existing Measures, only foreign legal entities could make strategic investments into Chinese listed companies. As for now, there are only limited channels for individuals to purchase A-shares (for examples under the QFII [Qualified Foreign Institutional Investor] and RQFII [RMB Qualified Foreign Institutional Investor] schemes).
However, the proposed new Draft expressly allows foreign individual investors to invest into Chinese listed companies, provided that they hold a certificate of no criminal conviction and are capable of bearing a certain level of risks.
- Financial resources requirements reduced
The Existing Measures established threshold requirements on the total amount of overseas assets the foreign investor or its parent company must own (not less than 100 million USD) or manage (not less than 500 million USD) to be able to invest into Chinese listed companies.
The new Draft reduces this minimum qualification requirement for non-controlling investors, who will be required to own total assets at least 50 million USD, or have a minimum of 300 million USD of assets under management.
For controlling shareholders, the threshold remains unchanged under the Existing Measures. However, the new Draft extends the scope of assets to include assets located both overseas and in China.
- Investment by qualified individuals allowed
- Removal of the lock-up period
The Existing Measures was aimed at encouraging medium to long term foreign investments above a certain level in Chinese listed companies, requiring foreign investors to purchase at least 10% of the total share capital of the targeted company, subject to a 3-year lock-up period.
The Draft removes such minimum acquisition requirement and shortens the lock-up period to 12 months (subject to special requirements under the securities laws). This will give foreign investors some flexibility on the amount of their investments.
- Cross-border share swap
The Draft allows foreign investors to use equity held in foreign companies to make strategic investments in Chinese listed company (under certain conditions).
Although cross-border share swaps are authorized under the Provisions on Foreign Investors’ Merger and Acquisition of Domestic Enterprises (for both listed and private companies), cross-border share swaps are only limited to foreign listed companies, making their implementation very difficult in practice.
- Excluded foreign investments and special formalities
The proposed measures will not apply to investments by QFII or RQFII and investments through the Shenzhen-Hong Kong Stock Connect or Shanghai-Hong Kong Stock Connect.
In addition, special administrative rules will continue to apply for any investments in State-owned enterprises or State-Owned equity.
Since the implementation of the Existing Measures back in 2005, only a very few numbers of foreign investors succeeded in obtaining the approval from the MOC to acquire stakes in industry-leading Chinese companies, making foreign strategic investments very difficult.
However, the new Draft provides some flexibility for strategic investments by foreign investors, by streamlining the process and reducing the requirements. This is in line with the Government’s policy in recent years to open the market to overseas investors and reduce foreign investments restrictions in various industries.
However, some issues are yet to be clarified and the implementation of the Draft by the authorities remain to be seen. Masson de Morfontaine will closely monitor the development of the Draft and will keep you informed on further clarifications to be made in the finalized version.
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