Strategies to tackle non-compliant overseas investment procedures

During IPO processes, regulatory bodies scrutinise whether companies have completed the requisite registrations and forex procedures for their overseas subsidiaries. Many domestic enterprises engaging in overseas investment often encounter issues with filing procedures at departments of commerce, development and reform departments, as well as forex registration procedures.

Instances of non-compliance with these procedures are not uncommon in audit cases. This article aims to summarise the legal flaws in the registration or filing procedures of overseas investment projects by enterprises, and propose strategies for rectification and response during the IPO process.

Partial non-compliance

Some overseas investment projects fail to file with departments of commerce. According to regulations such as the Measures for the Administration of Overseas Investment of Enterprises, departments of commerce manage the filing of overseas investment projects, except for those involving sensitive countries, regions or industries.

In several instances of overseas investment projects by IPO candidates, some projects did not undergo the required filing or modification procedures with departments of commerce. This poses risks such as warnings, interviews, notifications or other penalties from the commerce authorities. In severe cases, it could even lead to the suspension of overseas investment filing procedures.

In response to such procedural flaws, recent inquiries from stock exchanges of IPO cases have provided the following strategies: explaining the situation to the commerce authorities and applying for supplementary procedures; obtaining a statement from the commerce authorities regarding the legality and compliance of current overseas investment projects; and having the actual controller commit to assuming full liability.

The overseas investment was established without completing the filing procedures with the development and reform departments. Enterprises fail to undergo filing procedures with development and reform departments when establishing overseas investments.

According to regulations like the Measures for the Administration of Overseas Investment of Enterprises, development and reform departments at national and provincial levels oversee the filing of non-sensitive projects. Failure to comply with the prescribed procedures for overseas investment projects could lead to orders to suspend or terminate the investment projects.

On reviewing recent IPO inquiries cases, it is evident that many already listed companies have failed to complete the filing procedures with development and reform departments for their overseas investment projects.

Through the above-mentioned perspective, it can be argued that such non-compliance does not constitute significant legal violations and will not significantly impact the business operations of prospective IPO companies.

For these companies engaging in overseas investment, if filing with the development and reform departments is required by relevant regulations but not fulfilled, the response strategy to inquiries may include the following: demonstrating compliance with filing and forex registration management procedures with departments of commerce; explaining the reasons for non-compliance with the development and reform departments’ filing procedures, such as lack of familiarity with regulations and business procedures by personnel; consulting the relevant authorities on supplementary registration procedures; confirming if the authorities only require pre-filing for overseas investments without subsequent supplementary procedures, and if subsequent changes occur in overseas investment projects, submitting filing applications for the updated projects to achieve compliance; obtaining compliance certificates or conducting online checks from the competent authorities to confirm that the prospective IPO company has not been subject to administrative penalties or ordered to suspend or terminate corresponding overseas investment projects due to a failure to fulfill filing procedures with the development and reform departments; and having the actual controller commit to assuming full liability.

Overseas investment projects have not undergone forex registration. Domestic institutions are required to make forex registration for overseas direct investments before transferring assets abroad. Instances of IPO inquiries revealing non-compliance with forex registration procedures are relatively rare.

According to the Regulation of the People’s Republic of China on Foreign Exchange Administration and Foreign Exchange Business Guidelines for Direct Investment, the materials required for forex registration include certificates issued by departments of commerce such as the Enterprise Overseas Investment Certificate. Thus, if forex registration has not been completed, companies can proceed with registration after obtaining at least the filing certificate issued by departments of commerce.

Complete non-compliance

In cases where overseas investment projects fail to undergo registration with both development and reform departments, and departments of commerce and forex registration, and where the overseas subsidiary’s income significantly impacts the revenue of the IPO candidate, the company can resort to solutions such as liquidating the original overseas subsidiary and establishing a new one to transfer assets and operations.

Company HHXX, for example, rectified its non-compliance by establishing a new overseas entity to transfer existing operations. HHXX obtained a confirmation statement from the Shanghai Municipal Commission of Commerce and the Shanghai Development and Reform Commission, stating that its actions did not constitute significant violations.

Conclusion

The legality and compliance of overseas investment approval procedures has always been a focal point of IPO inquiries. If IPO candidates fail to comply with the filing or registration procedures for overseas investment projects, they should first explain the situation to the relevant authorities and seek guidance on supplementary procedures to obtain a statement confirming no significant violations.

In cases where overseas investment projects involve significant procedural flaws and income, companies can consider solutions such as establishing new overseas entities to transfer assets and operations.

Guo Xin is a partner and Xie Aqiang is a salaried partner at Grandway Law Offices
Zhu Zhu, a paralegal at Grandway Law Offices, also contributed to this article