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From "Comprehensive Approval System" to "Negative List Administration": Foreign Investment Regulation Loosened

2016-09-09/ARTICLES/ LIU Hongyu 刘红宇

Most foreign enterprises that I, a front-line lawyer, get in touch with in practical work hold that the laws and policies of China on foreign investment access set up too much approval and regulation that all matters, whether important or trivial, are required to be reported to the "original approving department" for approval,  involving foreign investment from the establishment to dissolution of a foreign-invested company, from the increase or decrease in the registered capital to the change in shareholders, and from the reinvestment in China to the adjustment to the operating period. The comprehensive approval system has become a barrier restricting the development of foreign-invested enterprises, so it is an urgent need to establish a new foreign investment regulation mode.
I. The approval is cancelled to facilitate the healthy development of foreign-invested enterprises
To take equity transfer of foreign-invested enterprises as an example, the change in shareholders of a foreign-invested enterprise, which is a typical approval item related to foreign investment, shall be reported for approval by the foreign-invested enterprise by presenting such documents as the equity transfer agreement entered into by and between the transferor and transferee and the resolution made by the board of directors, according to the Several Provisions on the Alteration of Investors' Equities in Foreign-invested Enterprises issued by the former Ministry of Foreign Trade and Economic Cooperation. The above provision will not lead to any issue under the normal circumstance that no dispute arises between the transferor and transferee.
However, in reality, many parties concerned fail to timely make a report for approval after the signing of an equity transfer agreement. After many years, along with the change in circumstances with the passage of time and the sharp increase in the value of equities in a foreign-invested enterprise, the transferor is unwilling to continue to perform the equity transfer agreement, so that both parties to the agreement sue to a court. It seems that such disputes may be settled through judicial relief, but due to the regulation requirement that the change of equities in a foreign-invested enterprise shall be subject to approval by the original approving department, the transferee often cannot get the approval for equity transfer for failure to submit such documents of the foreign-invested enterprise as the resolution made by the board of directors; the change in actual shareholders is restricted due to unfinished approval; and a large number of court decisions cannot be actually executed.
In practice, the "comprehensive approval system" for foreign-invested enterprises has been denounced for a long time. Fortunately, the Decision of the Standing Committee of the National People's Congress on Revising the Law of the People's Republic of China on Wholly Foreign-owned Enterprises and Other Three Laws was deliberated and adopted with a majority of votes at the 22nd Session of the Standing Committee of the 12th National People's Congress, according to which "the relevant approval items not involving the special administrative measures for access prescribed by the State shall be subject to record-filing administration", that is, the negative list mode for investment access adopted in the four pilot free trade zones will be promoted throughout the country. The administration over foreign-invested enterprises is improved greatly from the "comprehensive approval system" to the "record-filing system under the negative list administration mode".
II. The modification of foreign investment laws is a great favor for foreign-invested enterprises
Undoubtedly, the implementation of "record-filing system under the negative list administration mode" for foreign investment regulation is a huge boost for foreign investment practice.
The cancellation of the comprehensive approval system will narrow the differences in regulation between foreign-invested enterprises and Chinese-invested enterprises to the utmost extent. The establishment, division, merger, dissolution, capital increase, capital reduction, change of contribution mode, extension of operating period, expansion of business scope and other aspects of foreign-invested enterprises not involving "access restrictions" will no longer be subject to approval.
The law modification is conducive to enhancing the stability of investment. The issue of the approval system is too subjective. Different officers from different regions never have identical understanding of the relevant laws and regulations, so whether to approve is uncertain. Even though the record-filing system cannot completely eliminate this uncertainty, it will significantly enhance the stability of investment and increase the confidence in foreign investment.
The law modification is conducive to enhancing the efficiency of investment. Under the approval system, foreign-invested enterprises need to report many trivial items for approval, which often involves multiple levels of county, city and province and has lower efficiency, thus hindering investors' autonomy of will and dampening incentive to make investment. However, after the implementation of the record-filing system, like domestic enterprises, foreign-invested enterprises may handle the industrial and commercial registration firstly without the approval from the commerce department and then file with the commerce department within 30 days; meanwhile, investors may formulate the corresponding contracts and articles of association in the light of their own interests, fully embodying the principle of company autonomy.
III. The modification of foreign investment laws is the first step and the supporting laws and regulations shall also be formulated
In the course of practice, I have been paying attention to and promoting the modification of foreign investment laws. I ever advised the Ministry of Commerce to repeal or revise the Several Provisions on the Alteration of Investors' Equities in Foreign-invested Enterprises and other departmental rules that have become inappropriate as soon as possible within the scope of its functions and powers, trying to reduce the adverse effect of lagging law modification. I believe that this revision of the Law of the People's Republic of China on Wholly Foreign-owned Enterprises and other three laws is just the first step of the modification of foreign investment laws, and it is imperative to formulate the Foreign Investment Law to administrate and facilitate foreign investment.
The Foreign Investment Law of the People's Republic of China (Draft for Comment) promulgated by the Ministry of Commerce in January 2015 has put forward the idea of establishing a new regulatory system for foreign investment access featuring "limited licensing plus comprehensive reporting", and is intended to substantially cancel administrative approval. It is an urgent need to clarify the following issues: how to promote the "record-filing system under the negative list administration mode" after the cancellation of approval? How to properly deal with the relationship between the national negative list and the current list adopted in the pilot free trade zones? Is the national negative list formulated by completely copying the current negative list adopted in the pilot free trade zones or by making adjustments based on the major principle of loosening regulation? After the cancellation of the comprehensive approval system, are all the items subject to ex post record-filing, or are ex ante and ex post record-filing set up respectively for changes in significant items? Whether the super national treatments for foreign-invested enterprises should be canceled in order to substantially perform the equal treatments for foreign and domestic investment?
This modification of foreign investment laws is just the first step. It is a long-term, arduous task to speed up the clearing and repeal of inappropriate old laws, and formulate and introduce unified foreign investment laws and the corresponding supporting ones that meet the needs of economic globalization and conform to the rules of market economy.

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