On 26 August 2022, the National Development and Reform Commission (the “NDRC”) published the Administrative Measures for the Review and Registration of Mid- to Long-Term Foreign Debt of Enterprises (Draft -- Request for Comments) (《企业中长期外债审核登记管理方法（征求意见稿）》) (the “Measures”), soliciting public comments on the Measures. The Measures are intended to further perfect the regulation of mid- to long-term foreign debt, enhance the standardization, institutionalization, transparency and convenience of the regulatory regime, better manage risks relating to foreign debt, and promote the healthy and orderly development of the offshore financing market. The comment period ends on 26 September 2022.
Upon taking effect, the Measures will replace one of the key regulations pertaining to foreign debt: the Circular on Promoting the Reform of the Administrative System on the Issuance by Enterprises of Foreign Debt Filings and Registrations (《国家发展改革委关于推进企业发行外债备案登记管理改革的通知》（发改外资（2015）2044号)) (“Circular 2044”). We compare the Measures against Circular 2044 and summarize the major changes to enable market participants to better understand the Measures.
“Formalization” of the Regulatory Regime for Foreign Debt
In early 2022, the State Council promulgated the Circular by the General Office of the State Council on the Full Implementation of the List-Based Management of Administrative Licensing Items (《关于全面实行行政许可事项清单管理的通知（国办发（2022）2号）》）(the “State Council Circular”). The State Council Circular put into effect the decisions of the Chinese Communist Party Central Committee and State Council with respect to deepening the “simplification, decentralization, and optimization” (“放管服”) procedures to reform and improve the business environment. Under the State Council Circular, foreign debt falls under the list of activities subject to administrative licensing (行政许可).
Upon the implementation of the Measures, the NDRC will formally treat foreign debt as a matter subject to “review and registration” （审核登记）rather than the current system, which technically requires only “filing and registration” （备案登记）. Foreign debt will now be formally subject to administrative licensing. The official change in the level of regulatory review demonstrates the higher level of regulatory oversight applicable under the Measures, changing from a “circular”, which is a “normative document” not subject to formal legislative rules（规范性文件）, to an “administrative measure”, which is a type of “departmental rule” that is required to be published in the State Council Gazette（部门规章）. This change is consistent with the requirement under the Legislation Law of the People’s Republic of China (《中华人民共和国立法法》), which stipulates, inter alia, that only departmental rules and other types of legislation ranking higher in the legislative hierarchy may govern administrative licensing. This law therefore provides the legal basis for governmental supervision and oversight of mid- to long-term foreign debt.
New Regulatory Requirements
The Measures impose the following additional regulatory requirements:
- Compliance: The review and registration conditions require regulatory compliance on the part of the enterprise, its controlling shareholders and de facto controlling persons. None of the enterprise, its controlling shareholders or de facto controlling persons shall have, in the three years prior to the application, committed criminal offenses relating to corruption, bribery, illegal possession of assets, misappropriation of assets, sabotage of the socialist market economic order, or be currently under formal investigation （立案调查）on suspicion of other offenses, or currently under formal investigation on suspicion of material violations of laws and regulations;
- Use of Proceeds: The use of proceeds shall not: cause harm to the information and data security of China; increase the hidden debt incurred by local governments; or be deployed for speculative purposes. At the same time, the Measures expressly prohibit any use of proceeds that is not in accordance with the NDRC approval (审核登记证明) ;
- Report on Deployment of Proceeds: Within 10 working days after the expiry of the NDRC approval, the enterprise shall file a report with the NDRC on the status of the utilization of foreign debt.
- Continuing Reporting Obligations: Within five working days prior to the end of January and end of July of each year, the enterprise shall file a report with the NDRC detailing the deployment of proceeds as of the applicable period (资金使用信息), the status of payment obligations （兑付状况）, as well as material information pertaining to the enterprise’s operations. Where a material development may affect the enterprise’s ability to honour its debt obligations, or upon the occurrence of such material development, the enterprise shall file a report with the NDRC in a timely manner.
In addition, the Measures expressly set forth the legal consequences of certain offenses, including the unlawful incurrence of foreign debt, the furnishing of incomplete or false information in the application process, or the obtaining of the NDRC approval through illicit means. These legal consequences, including the imposition of cure periods or warnings, broadly align with those set forth in the Administrative Measures Regarding Overseas Investments by Enterprises (“Circular 11”) (《企业境外投资管理办法》（国家发展和改革委员会令第11号）). Under the Measures, where the enterprise and its major responsible persons borrow foreign debt in violation of regulations, they shall be temporarily barred from initiating or engaging in foreign debt-related activities.
Responsibility of Intermediaries
In the Notice on the NDRC’s Inquiry of Relevant Enterprises and Intermediaries Engaged in Illegal Foreign Debt Offerings （《发布国家发展改革委约谈违规发行外债的有关企业和中介机构》）, issued on 18 May 2018, the NDRC expressed its intent to hold intermediaries to greater accountability. In particular, serious violators would be put on a blacklist and the national credit information digital platform, and be prohibited from making new applications or participating in the filing and registration of foreign debt. The Measures follow the regulatory direction of the notice, and expressly impose legal liability on intermediaries for, inter alia, the provision of intermediary services for foreign debt activities in violation of the Measures, and the issuance of audit reports, opinions or disclosure containing concealment of facts, false reporting, misleading statements or material omissions.
Procedures for Review and Registration
The “drafting notes” to the Measures （“起草说明”）state that Circular 2044 “has fallen behind market practice”. Accordingly, the Measures seek to be aligned with current regulatory practices, including the use of an online platform, information required in applications, timeframe accorded to the processing of applications, and procedures for amendments to applications, which are expected to enhance the codification and efficiency of the application and approval process. These developments are welcomed by market participants. In addition, the Measures provide a formal definition of the term “domestic institution” (境内机构), which appears in Circular 2044. The Measures also make clear that their jurisdiction applies to “red chip” enterprises that incur foreign debt. The Measures define the term “control” （控制）, used in Circular 2044, by adopting the same definition of the term in Circular 11.
Toward Full Enactment
The State Council Circular targeted the end of 2022 for the finalization of matters covered by the circular. The Measures are therefore expected to take effect within the year. When the Measures become effective, Circular 2044 will be simultaneously repealed. Other rules and regulations pertaining to foreign debt promulgated by the NDRC are expected to remain in force. Examples of such rules and regulations include the Circular on the Perfecting of the Market Monitoring Mechanism and Strict Prevention of Risks Relating to Foreign Debt and Local Government Debt （《关于完善市场约束机制严格防范外债风险和地方债务风险的通知》（发改外资【2018】706号））, the Circular on the Relevant Requirements in the Application for Reporting and Registering Foreign Debt Issuances of Local State-Owned Enterprises （《关于对地方国有企业发行外债申请备案登记有关要求的通知》（发改办外资【2019】666号））, and the Circular on the Relevant Requirements in the Application for Reporting and Registering Foreign Debt Issuances of Real Estate Enterprises （《关于对房地产企业发行外债申请备案登记有关要求的通知》（发改办外资【2019】778号））.
