Warning for red chips regarding foreign debts

By Lai Jihong and Chen Jingeng, Zhong Lun Law Firm
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In the article titled “Risk warning to companies issuing bonds in overseas markets” published on its official website on 12 June 2017, the National Development and Reform Commission (NDRC) criticized China Water Affairs Group, China South City Holdings, Mingfa Group (International), Ping An Real Estate and China Mengniu Dairy for failure to complete upfront filing and registration procedures for issuance of foreign debt instruments and emphasized once more that issuers should apply for filing and registration prior to the issuance, and promptly submit details about the issue upon the issuance.

Lai JihongPartnerZhong Lun Law Firm
Lai Jihong
Partner
Zhong Lun Law Firm

Any issuers of foreign debts that fail to perform filing and registration procedures, warned the article, could risk finding their name in the bad credit record of the National Enterprise Credit Information Publicity System (NECIPS) or on the joint sanction information platform. Meanwhile, the NDRC requires intermediaries such as lawyers and underwriters to co-ordinate in regulation over issuance of bonds.

As is understood, being included in the bad credit record of the NECIPS will have an impact on subsequent fundraising and other relevant activities of an enterprise. Among the five companies criticized by name, Mengniu and China Water Affairs Group are so-called red-chip companies, i.e., internationally incorporated companies whose businesses are based in mainland China. In this article the authors will explore whether red-chip companies need to complete filing procedures with the NDRC in connection with issuance of bonds in overseas markets.

Filing of foreign debts

Pursuant to the Notice of the National Development and Reform Commission on Promoting the Administrative Reform of the Filing and Registration System for Issuance of Foreign Debts by Enterprises (notice No. 2044), published on 14 September 2015, a domestic enterprise, or any foreign enterprise or branch under its control, which issues debt instruments denominated in local or foreign currency with maturity of more than one year and a covenant of principal and interest repayment outside the PRC (including, without limitation, issuing bonds in or obtaining medium and long-term international commercial loans from overseas markets), must complete filing and registration procedures with either the NDRC or NDRC agencies before issuance of the foreign debts.

Chen JingengPartnerZhong Lun Law Firm
Chen Jingeng
Partner
Zhong Lun Law Firm

To put it simply, upfront filing procedures need to be completed with the NDRC in connection with issuance of foreign debts insofar as: (1) the issuer is a domestic enterprise or a foreign enterprise or branch under its control; and (2) the foreign debts have a tenure of one year or more.

Before the introduction of notice No. 2044, a domestic institution that issues foreign debts directly in its own name must obtain approval from the NDRC before the issuance, as stipulated in the notice of the State Planning Commission and the People’s Bank of China on Opinions about Further Strengthening Administration over Issuance of Foreign Debts (the opinions).

A domestic non-financial institution or any of its overseas branches that issue bonds denominated in RMB with maturity of one year or more outside the PRC (e.g., in Hong Kong or any foreign country or region outside Hong Kong) must complete filing procedures with the NDRC before the issuance, as stipulated in the Notice of the National Development and Reform Commission on Matters Concerning Issuance of RMB Bonds by Domestic Non-financial Institutions in Hong Kong Special Administrative Region (notice No. 1162).

Only domestic enterprises and foreign enterprises, or branches under their control, are required by the opinions, notice No. 1162 and notice No. 2044 to complete upfront filing/approval procedures with the NDRC in connection with issuance of bonds outside the PRC. In other words, foreign enterprises under control of foreign entities or foreign enterprises under control of natural persons from the PRC (e.g., small red-chip companies) are not required to complete filing/approval procedures with the NDRC when issuing bonds outside the PRC. That was why, before introduction of notice No. 2044, many domestic enterprises issued foreign debts indirectly through a foreign SPV (special purpose vehicle) that acted as the issuer.

Interpretation inconsistencies

In practice, however, the NDRC and its local offices may interpret notice No. 2044 in different ways. Some local NDRC offices, acting strictly in accordance with notice No. 2044 and thus deciding that filing is not required for “small red-chip companies” and other enterprises not under control of domestic enterprises, may reject filing applications from such entities.

But the NDRC may expand the applicability of notice No. 2044 to a wider range of subjects at its discretion, and include small red-chip companies into the list of entities that can be required to complete filing for issuance of bonds overseas. For instance, the most recent list of foreign debt issuers who have submitted filing applications, as published on the official website of the NDRC, includes Country Garden Holdings and Longfor Properties, both considered small red-chip property developers. Both have completed filing procedures in accordance with notice No. 2044 before issuance of foreign debts.

Based on the authors’ experience, when deciding whether to expand the applicability of notice No. 2044 to a foreign issuer, in addition to nationality of the issuer’s management, the NDRC focuses on checking whether the principal shareholder of the foreign issuer is a Chinese citizen, and whether the primary business of the issuer is based in mainland China.

Due to a lack of explicit criteria for expanded applicability, and inconsistency in the interpretation of regulations by the NDRC and local NDRC offices, some red-chip companies lucked through previously, issuing bonds in overseas markets without completing filing procedures with the NDRC.

However, with the “Risk warning to companies issuing bonds in overseas markets” published on its official website, the NDRC raises a warning to issuers and intermediaries, emphasizing that red-chip companies, whether or not consolidated to fiscal reports of domestic affiliates, must go through filing procedures with the NDRC before issuing bonds outside mainland China.

Author: Lai Jihong and Chen Jingeng are partners at Zhong Lun Law Firm in Shenzhen

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