In 2008, the China Banking Regulatory Commission announced the “Guidelines on the Risk Management of Mergers and Acquisition Loan Business of Commercial Banks.” These guidelines now allow commercial banks in China to finance M&A activities. The new guidelines have generated massive interest from Chinese commercial banks in exploring opportunities in M&A financing to support Chinese enterprises. Due to the global financial crisis outbound acquisition financing has become extremely attractive and Chinese enterprises are able to acquire overseas businesses at attractive prices.
Despite the CBRC’s allowance of M&A activities, there are several regulatory issues regarding overseas securities in outbound M&A financing. The State Administration of Foreign Exchange’s (SAFE) “Circular on Relevant Issues concerning the Improvement of Foreign Debts Administration,” specifies that without the approval of central SAFE, onshore borrowings by domestic enterprises must not be secured by any overseas security. In practice, such approval is extremely difficult to obtain.
In the past decade, the Chinese Government has encouraged Chinese enterprises to invest outbound. In response, SAFE has abolished many restrictive regulations. For example, the requirement for Chinese investors to pay a deposit on their outbound investments and the foreign exchange purchase quota applicable to Chinese investors have been removed. Furthermore, domestic enterprises are now allowed to use domestic foreign currency loans to finance their outbound investment, subject to registration with local SAFE.
Although the regulatory policy has been relaxed slightly, failure to satisfy SAFE approval requirements may result in Chinese banks receiving regulatory penalties and damage to their reputation. “Given the fact that the regulations are not entirely clear, Chinese banks would be well served to consult both professional advisers and local SAFE prior to determining the financing structure of an outbound M&A transaction,” said Edward E. Lehman, Managing Director of Lehman, Lee & Xu.