New NDRC rules on Medium and Long-term Foreign Debts

Background introduction

The National Development and Reform Commission ("NDRC"), announced on its official website in early January this year the Administrative Measures for Examination and Registration of Medium and Long-term Foreign Debts of Enterprises (the "2023 NDRC Foreign Debt Rules") which become effective on 10 February 2023 and created a buzz in the limelight.

To understand the process of the 2023 NDRC Foreign Debt Rules, we have prepared a flow chart below which will help you to navigate the rules. You can click and download the chart below.

General statement of principle

The 2023 NDRC Foreign Debt Rules lend substance to NDRC's management under the Principle of "total quantity control, structure optimisation, serving real economy and risk prevention.

Fundamental alterations in the 2023 NDRC Foreign Debt Rules

Q. Who will be subject to the 2023 NDRC Foreign Debt Rules?

A. The entities which are subject to NDRC foreign debt rules remain unchanged, being non-financial and financial PRC enterprises and overseas enterprises or branches controlled by them (i.e. these PRC enterprises holding direct or indirect ownership of more than half of an enterprise's voting rights, or the ability to dominate important matters such as operation, finance, human resources and technologies).

However, the 2023 NDRC Foreign Debt Rules expressly refers to "indirect borrowing of foreign debt by onshore companies", which refers to an offshore borrower whose principal business activities are conducted within the territory of China.  The newly-published Guideline illustrates how to define the element of "principal business activities conducted in PRC":

(i)      the ratio of any indicator of operating revenue, net profit, total assets or net assets of the domestic enterprise to the relevant data of the audited consolidated financial statements of the issuer/borrower for the same period exceeds 50%; and

(ii)    the business activity is carried out in PRC or the main premise is located in PRC, or the majority of senior management personnel in charge of business management are Chinese citizens or their usual place of residence is located in PRC.

Q. What are Medium and Long-term Foreign Debts and Debt Instruments?

A. Medium and Long-term Foreign Debts refer to Debt Instruments, including but not limited to senior bonds, perpetual bonds, capital bonds, medium-term notes, convertible bonds, exchangeable bonds, finance leases and commercial loans, etc with a maturity of more than 1 year (excluding), denominated in Renminbi or a foreign currency. The scope of foreign debts is broadened and more detailed to include almost all sorts of comprehensive bonds in the debenture market compared with Circular No.2044.

Q. Is it now an approval or registration system?

A. In circular No.2044, it removed the quota examination and approval and implemented administration via Filing and Registration instead. This was regarded as relaxation of foreign borrowing. However, the 2023 NDRC Foreign Debt Rules now require "Examination and Registration".

In another word, enterprises that borrowing from offshore are obliged to apply to NDRC prior to drawdown, so that NDRC can exam terms and criteria before issuing an Examination and Registration Certificate.  This, in our view, has reinstated an approval regime, although it is said that previously when NDRC issued filing certificate under circular No. 2044, NDRC also inspected terms and criteria, the confirmation of "examination" in the 2023 NDRC Foreign Debt Rules strengthened NDRC's power officially.

Q. Can anybody apply to borrow foreign debt?

A. The 2023 NDRC Foreign Debt Rules provide that eligible applicants shall meet the following requirements: duly established, in compliance with regulations, sound organisational structure, good credit status, in solvent, equipped with risk prevention and control mechanism, inter alia, has a reasonable demand for funds raised from foreign debt and that its controlling shareholders or ultimate controllers have NOT committed, in the latest three years, criminal crimes or be in any violation of laws and regulations. These criteria has formalised the first barrier to potential borrowers of foreign debt before any borrower can borrow foreign debt and complete SAFE registration.

Q. How to apply and how long does it take?

A. Enterprises shall apply via Management and Service Network System for Examination and Registration of Foreign Debts of Enterprises online. In the meantime, follow the steps and processes listed in the new Guideline to complete requisite formalities.

Circular No. 2044 made the process very efficient by promising only 7 working days after receiving an application to issue a filing certificate. The 2023 NDRC Foreign Debt Rules expanded that to 3 months, which matches the requirement of more stringent and precise review (i.e. examination and registration) process by NDRC.

Q. Use of proceeds of foreign debt?

A. Most of the criteria on use of proceeds of foreign debt remains unchanged comparing with Circular No. 2044. In the meantime, the 2023 NDRC Foreign Debt Rules lifted the ban on "not to make up for losses and non-productive expenditures"; added the restriction of no speculation.

On top of that, enterprises are normally not allowed to re-lend the funds raised from foreign debts to others, unless relevant information has been stated in the application materials for examination and registration of foreign debts and the approval has been obtained.

These seem to indicate that NDRC has now more open mind in relation to use of proceeds of foreign debt but keep the control in its hands.

Q. What will happen during the post utilisation/issuance?

A. For interim supervision, after each borrowing of foreign debts and upon the expiration of the Certificate of Examination and Registration, enterprises shall submit the information on borrowing of foreign debts to the examination and registration authorities within 10 working days.

For inspection afterwards, enterprises shall submit to the examination and registration authorities the information on utilisation of funds raised from foreign debts, repayment of principal and interest, planned arrangements and major business indicators, etc within the first five working days of the end of January and July each year.

Q. What are the sanctions?

A. Compared with the "Three Warnings" system proposed in the guideline of Circular No. 2044, the 2023 NDRC Foreign Debts Rules have included different measures such as official interviews and public warnings, order to make corrections within a prescribed time limit, revoke certificates, violations be publicised on the website of "Credit China" and the national enterprise credit information publicity system, etc depending on the seriousness of the circumstances. Given these, we think that NDRC will find it easier to exercise the power to give sanctions should they find appropriate to do so.

Our view

The 2023 NDRC Foreign Debt Rules emerged at the time when the authorities are given more power to beef up governance and enhance inspection.

(i) What have been reinforced?

It has changed the system to examination and registration, which means that companies are subject to stricter and potentially longer term of application process before carrying out foreign debts activities. Indirect borrowing of foreign debts overseas by domestic enterprises also falls under the scope of regulation and companies have to figure out if their principal business activities are conducted in PRC or not in accordance with the guideline.

(ii) What have been eased or become more lenient?

It appears to be more lenient on the purposes for issuing foreign debts, which leaves more room on use of proceeds.

(iii) What are extra obligations laid on enterprises in offshore financing?

It requires broader disclosure obligations.

As a result, companies who wish to borrower foreign debt either by foreign loans or issuing foreign bonds must reserve more preparation time to arrange the application schedule for approval from the NDRC in advance before transaction can take place. In addition, they shall be more cautious in the preparation of application documents to improve the possibility of successful and smooth application process given the lengthy examination period.

In addition, if an offshore borrower intends to borrow outside of the PRC (either by way of commercial loans or issuing bonds), but relies on to certain extent assets, interests properties of an onshore entity to obtain the credit, then parties need to consider carefully the structure in order to identify the necessity of NDRC registration and counsels should be contacted on a case-by-case basis.