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December 16, 2011 |
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Orrick's Asia Private Equity Practice
Covering all aspects of the private equity business
cycle from fund formation, regulatory issues and capital
raising, to investment, company representation and
management, and exits via listings or trade sales,
Orrick's Asia private equity team represents global
private equity investors on a wide range of activities
across the Asia-Pacific region. Clients include Mount
Kellett Capital, One Equity Partners, PineBridge Capital
(formerly AIG Investments) and Warburg Pincus.
For information, please contact:
Maurice
Hoo Partner, Hong Kong mhoo@orrick.com +852
2218 9130
Sook
Young Yeu Partner, Hong Kong syeu@orrick.com +852
2218 9155
Brad
Herrold Of Counsel, Beijing bherrold@orrick.com +86
10 8595 5616 |
NDRC Expands Mandatory Filing of RMB Funds
Nationwide
On November 23, 2011, China's National Development and
Reform Commission (the NDRC) issued the Circular on
Promoting the Standardized Development of Equity Investment
Enterprises (Fa Gai Ban Cai Jin [2011] No. 2864)
(Circular 2864), which came into effect on the date of
issuance. Circular 2864 follows the Circular on
Further Regulating the Development, and the Administration on
Filings, of Equity Investment Enterprises in Pilot Areas,
issued January 31, 2011 (Circular 253) and 11
guidelines issued on March 21, 2011 (the
Guidelines). Circular 253 described certain "best
practices" for "equity investment enterprises," which include
private equity funds and fund of funds ("EIE") and
required certain EIEs established in six pilot locations to
carry out a filing procedure with the NDRC. The
Guidelines clarified some ambiguities under Circular 253, set
forth various procedures and forms for carrying out the
filing, and recommended certain content for the key documents
that would accompany a filing submission. Please see our
Asia in Focus newsletters on Circular 253 here
and on the Guidelines here.
Expanded Scope of Filing Procedure
Circular 2864 extends the reach of Circular 253 beyond the
pilot locations to cover EIEs established in mainland
China. An EIE with a fund size of at least RMB 500
million (or its foreign exchange equivalent) is required to
submit to the NDRC an application to carry out the filing
procedure within 30 days after the issuance of a business
license, unless (i) it is a venture capital enterprise that
makes filings in accordance with applicable laws, or (ii) all
its capital is contributed by one institutional or individual
investor, or by one institution through its wholly owned
subsidiaries. Whereas Circular 253 expressly excluded
EIEs with a fund size of less than RMB 500 million, Circular
2864 requires such EIEs to carry out the filing procedure with
the relevant filing administration department at the
Provincial People's Governments.
Application to Foreign Invested Funds and Fund
Managers
It often takes time to determine whether a new rule or
policy in China will be applied to foreign investors and
foreign invested enterprises, absent an express statement on
point. Like Circular 253 and the Guidelines, Circular
2864 does not distinguish between purely domestic invested
funds, foreign invested funds and funds with domestic
investors but a foreign or foreign invested fund
manager. Circular 2864, however, requires a foreign
invested EIE to carry out the standard NDRC project
verification and approval procedure, if applicable, when it
makes portfolio investments. Based on this express
reference, it appears that Circular 2864 is intended to apply
to foreign invested funds and fund managers.
Lack of National Treatment for Foreign Invested
Funds
Circular 2864 does not expressly state whether a foreign
invested EIE, or a fund with domestic investors but a foreign
or foreign invested fund manager, will be treated as a
domestic invested fund or subjected to the restrictions and
delayed closing requirements imposed under China's foreign
investment regime. Borrowing from WTO lexicon, this
concept is often referred to as an extension of "national
treatment."
Foreign investment projects in China generally require
project approval from the NDRC (where the project involves
fixed assets), foreign investment approval from the Ministry
of Commerce (MOFCOM) and registration with the State
Administration for Foreign Exchange (the SAIC), or
their respective subordinates at the local level. These
procedures are lengthy and document-intensive. Moreover,
foreign investors and foreign invested enterprises are limited
in their ability to invest in certain industries, including
the internet, media and related sectors.
By contrast, domestic enterprises generally are permitted
to make equity investments in other domestic enterprises that
operate in these growth industry sectors by carrying out only
the registration procedure with the SAIC or its subordinate at
the local level. Hence, if foreign invested EIEs, and
funds with domestic investors but a foreign or foreign
invested fund manager, are given national treatment, they
would be able to compete with purely domestic invested funds
on a level playing field.
By requiring a foreign invested EIE to carry out the
standard NDRC project verification and approval procedure,
where applicable, Circular 2864 appears to consider equity
investing by foreign invested funds as subject to the approval
delays and other restrictions applicable under China's foreign
investment regime. As Circular 2864 is an internal
document, and hence MOFCOM and the SAIC did not participate in
its preparation and promulgation (and have not publicly
commented on its application), at this time we assume that
Circular 2864 does not extend national treatment to foreign
invested EIEs.
Unresolved Foreign Exchange Restrictions
In accordance with China's foreign exchange control rules,
the foreign currency contributions to a foreign invested
enterprise may not be converted into RMB for the purpose of
making equity investments, except where such conversion is
expressly permitted. Hence, unless it has independently
generated sufficient RMB cash or it qualifies under one of the
widely reported quota systems for "qualified foreign limited
partners" that are expressly permitted in certain pilot
cities, a foreign invested EIE may not be permitted to fund
its investments. Circular 2864 does not address this
issue, and it remains to be seen if the central government
will issue rules to expressly permit the conversion of foreign
currency by foreign invested EIEs, or funds with domestic
investors but a foreign or foreign invested fund manager, for
the purpose of making equity investments.
Verification of the Number and Qualification of
Investors
The Circular 2864 provides that the number of investors in
an EIE must conform to the relevant provisions of the
Company Law of the People's Republic of China
(Company Law) and the Partnership Enterprise Law of
the People's Republic of China (Partnership
Law). The Company Law limits a company limited by
shares to between two and 200 promoters and a limited
liability company to no more than 50 shareholders, while the
Partnership Law requires a general partnership to have two or
more partners and a limited partnership to have one general
partner and no more than 50 limited partners. The NDRC
will calculate the number of investors by examining the actual
individual or institutional investors involved without regard
to investors who aggregate their investments jointly through a
trust, though it will treat a fund of funds as a single
investor. It also will verify the qualifications of each
investor.
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