On 29 March 2022, the State Council of China promulgated its Decision on Amending and Abolishing Some Administrative Regulations (Order No. 752), which amended certain provisions under 14 administrative regulations including the Regulations on the Administration of Foreign-funded Telecommunications Enterprises (revised in 2016). The amended Regulations on the Administration of Foreign-funded Telecommunications Enterprises (FTE regulations) came into force on 1 May 2022.
The amended FTE regulations further relax the entry threshold for foreign-funded telecoms operators and may impact on the future financing and listing of variable interest entity (VIE) structured enterprises.
Q: In foreign-funded telecoms operators, can the shareholding ratio of foreign investors break through existing restrictions?
A: The pre-amendment FTE regulations provide that the proportion of foreign investors in foreign-funded telecoms operators engaged in basic telecommunications business shall not exceed 49%, and in value-added telecoms business shall not exceed 50%.
In practice, China (Shanghai) Pilot Free Trade Zone and Hainan Free Trade Port have relaxed restrictions on the foreign-funded shareholding ratio in qualified value-added telecommunications business enterprises. The amended FTE regulations add the expression “unless otherwise provided by the state” for restrictions on foreign-funded shareholding ratios, leaving room to further relax the restrictions on foreign-funded shareholding ratios at the national level.
Q: Are there any changes to the difficulty in applying for telecommunications business licences?
A: The amended FTE regulations no longer require foreign major investors applying for telecommunications business licences to have “good performance and operation experience”.
Since major foreign investors of foreign-funded enterprises applying for basic telecommunications business are still required to obtain basic telecommunications business licences in countries where they are registered, the article amendment will have no substantial impact on the difficulty in applying for basic telecommunications business licences, but is of great significance to foreign-funded telecom operators applying for value-added telecommunications business licences, implying that the difficulty foreign-funded telecoms operators have in subsequently applying for value-added telecommunications business licences will be greatly reduced.
Q: Are there any changes to the procedure for applying for telecommunications business licences?
A: In line with the Foreign Investment Law, the amended FTE regulations provide that foreign-funded enterprises applying for telecommunications business licences shall first register as foreign-funded enterprise entities, then apply for the telecommunications business licences.
Registered foreign-funded telecoms operators are no longer required to obtain an Approval Certificate for Foreign-funded Enterprises, and the Approval Opinions for Foreign-funded Telecommunications Business. When applying for telecommunications business licences, they are only required to submit investors’ information, qualification certificates and confirmation documents to the Ministry of Industry and Information Technology (MIIT). For basic telecommunications business, the MIIT will decide whether to approve them within 180 days and, for value-added telecommunications business, within 60 days.
Before the amendment, the FTE regulations divided value-added telecommunications business into intra-provincial and inter-provincial business, and handed the power of preliminary review for intra-provincial business to provincial telecommunications authorities, which submit their review results to the MIIT for final review. The amended FTE regulations no longer distinguish whether the telecommunications services are inter-provincial, and all applications should be submitted to the MIIT for review and approval.
Q: What impact will this amendment have on the future financing and listing of VIE-structured enterprises?
A: Hong Kong’s stock exchange (the HKEX) strictly restricts the VIE structure for enterprises listed in Hong Kong. For enterprises not included in the negative list for foreign investment, the VIE structure should not be adopted in principle.
In practice, many VIE-structured enterprises explain to the HKEX the rationale for adopting the VIE structure when they are listed in Hong Kong because their foreign investors cannot meet the requirements of “good performance and operation experience” and, if foreign investors directly hold shares, they will be unable to apply for value-added telecommunications business licences.
After this amendment to the Foreign Investment Law, the difficulty in applying for value-added telecommunications business licences will be greatly reduced. If subsequent supporting regulations are issued, such as specifying under what circumstances the proportion of foreign-owned shares may break the limit, and if, in practice, the MIIT reduces foreign-funded enterprises’ difficulties in applying for telecommunications business licences, it may affect the rationale for adopting the VIE structure by enterprises to be listed in Hong Kong.
Zhang Dan is a partner at AnJie & BB Law Firm
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