On 14 September 2015, the National Development and Reform Commission (NDRC) issued the Notice on Reforming the Recordal and Registration System for the Overseas Debt Issuance by Enterprises (the Notice). After the issuance of the Notice, China’s overseas debt administration changed from the approval system to the total quantity control recordal system. During the past few years, the scale of overseas debt has been increasing.
Chinese enterprises currently employ three principal models to issue offshore bonds: (1) direct issuance by a domestic enterprise, i.e., a domestic enterprise issues the offshore bonds directly; (2) indirect issuance by a domestic enterprise, i.e., 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.
The overseas issuance of debt by a small red-chip enterprise is a special type of “overseas debt issuance by a Chinese enterprise”. The reason 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”. Therefore, when the Notice was initially issued, those in the industry generally did not consider the overseas 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 “overseas debt issuance by a Chinese enterprise” – the NDRC required the “overseas 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 Overseas 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 overseas 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.
Recently, the Department of Foreign Capital and Overseas Investment within the NDRC also called in eight issuers of overseas debt and such intermediary firms as underwriters, law firms, etc. for talks, and published the details on its official website on 18 May 2018. The regulator pointed out the violations of regulations committed by the enterprises in their overseas issuance of debt, and demanded that the enterprises and intermediary firms comply with the prior recordal/registration requirements of the Notice and regulations on the overseas debt issuance. The regulator said 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 overseas debt issuance and, depending on the seriousness, 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 new overseas debt recordal/registration or participating in it.
From the 2017 criticism by name to the talks in 2018, the NDRC’s attitude towards the overseas issuance of debt by small red-chip enterprises progressively became clearer, i.e. small red-chip enterprises need to be incorporated into the scope of regulation of the Notice.
However, the term “small red-chip enterprise” is not strictly or 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:
Main place of business activities. If an enterprise’s main place of business activities is located outside 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.
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 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 overseas issuance, the intermediary firms must also be more prudent as to whether pre-issuance filing with the NDRC is required for such a project.
Ling Tezhi and Du Linhong are partners at Jingtian & Gongcheng