Share with a colleague. 16 July 2012 Hong Kong. Awards. Background. International TMT Team of the Year China Law & Practice Awards, 2011

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1 Page 1 of 2 Breaking news: PRC telecoms market finally open for private domestic and foreign investments? On 27 June 2012, the Ministry of Industry and Information Technology released a ground-breaking opinion on encouraging private investment in a number of telecoms areas previously closed to private investors. Background Despite China's accession to WTO in 2001, the basic telecoms business (BTB) market remains dominated by the three state-owned enterprises: China Mobile, China Unicom and China Telecom. Domestic private investors have been encouraged to participate in the value-added telecoms business (VATB) market only. Share with a colleague 16 July 2012 Hong Kong Awards International TMT Team of the Year China Law & Practice Awards, 2011 Contacts The existing restrictions on foreign investment in the PRC telecoms business are explained in our previous e-bulletin. In short, although PRC laws theoretically permit private and foreign investments in the BTB market, we are not aware of any telecoms operators in the BTB sector which have foreign investors and the number of such operators with private domestic investors is very limited. The recent opinion issued by the Ministry of Industry and Information Technology (MIIT) is the first time that unambiguous wording is used on encouraging private investment in specific categories of telecoms business. Michelle Chan Partner, Hong Kong Key features of the opinion The salient points of the opinion are summarised below: 1. Difference in the "mode" of investment BTB: The opinion provides that private investment is encouraged to be made in BTB by way of capital participation. This may be achieved by having the telecoms operators listed on a PRC stock exchange, followed by the sale of the shares held by the state-owned enterprise in the listed company or expansion of the capital of the listed company and subscription of new shares by the private investors. In addition, the opinion also expressly states that support will be given to BTB operators that wish to introduce strategic investors. VATB: There is no equivalent restriction in relation to VATB and therefore a private investor can set up a 100% private enterprise to engage in any VATB. 2. Telecoms businesses to be opened to private investment The opinion sets out the telecoms businesses in which private investments are encouraged to be made, including: Re-sale of mobile communications services (on a trial basis) the opinion does not contain any details on what this service may encompass and hence the scope of activities potentially covered could be fairly broad. For example, it may cover simple resale of mobile SIM cards but it may also Karen Ip Partner, Beijing Clarice Yue Senior associate, Hong Kong Related links Herbert Smith website

2 Page 2 of 2 extend to operation as a mobile virtual network operator (MVNO). Further clarifications will be needed. Network access services (on a trial basis) and customer premises network (CPN) services as discussed in our previous bulletin, the MIIT intends to allow domestic private investors to enter into CPN services by establishing a limited liability company jointly with the three existing carriers and the commercial arm of the State Administration of Radio Film and Television. Domestic private investors could own up to 49% of the equity interest in the joint venture company. The opinion represents a further opening of the network access services and CPN services markets to private investors. Managed network services and construction and management of network infrastructure telecoms operators in China are encouraged to outsource or arrange for part of their telecoms networks to be managed by managed network service providers with private investors. Similarly, BTB operators are encouraged to outsource the construction, operation and maintenance of network infrastructure such as base stations and towers to enterprises with private investors and through such arrangements to share the facilities. Internet data centre (IDC) and internet service provider (ISP) although there are private investments in the IDC and ISP businesses in China, a moratorium on the issuance of further telecoms licences to operate IDC and ISP businesses has been in place since The express reference to the IDC and ISP businesses in the opinion formally signifies the end of this moratorium. homepage publications Herbert Smith publications Herbert Smith news Observations Policy-wise, the opinion no doubt represents one of the most significant steps of the PRC government to further open up the telecoms market to non-state owned enterprises, which, in the past, have largely been confined to several categories of VATB (e.g. online information services). Notwithstanding this, the opinion does raise a number of questions and issues and it is expected that they will be clarified and answered in due course, including: 1. It is unclear at this stage whether "private investment/capital" also encompasses foreign investments. The conventional thinking appears to be that it is unlikely that such reference is intended by the PRC government to cover 'foreign' private investors. This interpretation seems consistent with that of various official documents in which the same term has been used. 2. Detailed regulations are expected to be issued by the MIIT to clarify the implementation procedures of the opinion in due course. For example, the services which "re-sale of mobile communications services" may cover and how the trial is to be implemented. Subscribe to other publications update my details To unsubscribe from this e-bulletin, please click here. The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication. Herbert Smith 2012 This message is sent by Herbert Smith, 23/F Gloucester Tower, 15 Queen's Road Central, Hong Kong. Tel: asia@herbertsmith.com. 這 個 信 息 是 由 史 密 夫 律 師 事 務 所 發 出 地 址 : 香 港 皇 后 大 道 中 15 號 告 羅 士 打 大 廈 23 字 樓, 電 話 : , 電 郵 :asia@herbertsmith.com 不 希 望 接 收 本 电 子 报 如 阁 下 不 希 望 接 收 本 电 子 报, 请 点 击 此 处

3 Page 1 of 3 A prelude to breaking the monopoly in the telecom industry in China? Recent policy developments prompted by the PRC government suggest that "private enterprises" are encouraged to participate in monopolised industries. Li Yizhong, the Minister of the Ministry of Industry and Information Technology (MIIT), stated in an interview in September 2010 that the MIIT is currently looking into the involvement of "private enterprises" in the telecom industry. Could this mark the beginning of further liberalisation in the telecom market in China? What are the developments? In the hope of fostering greater input from "private enterprises" in various sectors and industries, China's State Council issued a set of opinions on 7 May 2010 entitled "Opinions on encouraging and guiding the healthy development of private investments" (Guofa [2010] No. 13). The construction of telecom facilities is one of the key sectors highlighted in the opinion. The opinion specifically encourages: 11 October 2010 To subscribe or unsubscribe To enquire about further Herbert Smith publications or to unsubscribe from this e- bulletin, please us. 如 欲 閱 覽 史 密 夫 律 師 事 務 所 的 其 它 書 刊 或 不 想 繼 續 閱 覽 這 電 子 郵 件, 請 聯 絡 我 們 Contacts equity investment or equity participation in basic telecom business (BTB); and the setting up and development of value-added telecom business (VATB). Subsequently, the State Council also issued the "Opinions on the enhancement of mergers and acquisitions of enterprises" (Guofa [2010] No. 27) on 6 September This set of opinions aims at eliminating the impediments to mergers and acquisitions through several key implementations, and in particular relaxing the market entry for private enterprises and promoting mergers and acquisitions in the infrastructure sectors. The Minister of the MIIT further wrote in the Economic Times on 14 September 2010 that the Ministry is devising policies through which private enterprises are encouraged to participate in monopolistic industries such as, specifically, the telecom business. What are the key business implications of this policy development? Michelle Chan Head of TMT, Asia Karen Ip Partner, Beijing From the perspective of Chinese private investors, this is essentially good news. The China Financial Times reported that until 2009, SOEs capital was permitted to enter 72 of 80 industries in China while private Chinese capital acquired access to 41. Not surprisingly, the telecom facilities market is dominated by State-owned enterprises (SOEs). As such, the significance of the two opinions and the remark made by Minister Li is telling in that the PRC government explicitly referred to the entry of private enterprises into the telecom facilities market. This train of events Clarice Yue Senior associate, Hong

4 Page 2 of 3 seems to suggest that policy-wise, for the first time since the limited liberalisation permitted in VATBs, private enterprises could engage in basic telecom business (which essentially involve the construction and operation of telecom networks and facilities). Will foreign investors benefit from this development? Nevertheless, a notable caveat is the definition of a "private enterprise" in the PRC. This is only a reference to a domestic enterprise in China, i.e. a Chinese company with no foreign or state-owned equity participation. In other words, a foreign investment enterprise does not fall within the remit of the developments described above and on the face of it, foreign investors are very likely to be precluded from benefiting from these policy measures and any related relaxation. Kong Related links Herbert Smith website More Herbert Smith TMT publications Accordingly, since foreign investments do not benefit directly from the above policy developments, the existing restrictions on foreign investment in the PRC telecom business, set out in the "Administrative Regulations on Foreign Investment in Telecommunications Enterprise" (State Council Order no. 333 of 2001) (the Administrative Regulations) remain applicable: a foreign investor may hold (i) no more than 49% direct or indirect equity interest in a PRC company which holds a BTB telecom licence; and (ii) no more than 50% direct or indirect equity interest in a PRC company which holds a VATB telecom licence. As noted above, the telecom networks and facilities market (BTB) is still dominated by SOEs. Notwithstanding the provisions set out in the Administrative Regulations which in theory permit foreign investment in BTB, according to the MIIT's released statistics, the number of approved equity joint ventures established between Chinese and foreign investors to operate telecom business (FITEs) is very limited: since 2002, only 27 FITEs have been approved, and of which none is involved in the operation of BTB. Any other signs for liberalisation? Despite the seemingly bleak outlook for foreign investors, there has been some developments in the PRC telecom regulatory regime relating to foreign investments. Most conspicuously, on 10 September 2008, the Administrative Regulations have been amended to reflect, amongst others, the following key changes since 2009, as illustrated in Box 1: the minimum registered capital of a FITE for (i) nationwide or Inter-provincial BTB is halved from RMB 2 billion to RMB 1 billion; and (ii) for Intra-provincial BTB is halved from RMB 200 million to RMB 100 million; and the requirement to submit a feasibility study as part of the application for establishing a FITE is removed. Box 1: A summary of major regulatory changes affecting foreign-invested telecommunications enterprises Minimum Registered Capital Since 2002 Since 2009 Nationwide or interprovincial Intraprovincial 1 BTB 2 billion 200 million 1 billion Nationwide or interprovincial Intraprovincial 100 million VATB 10 million 1 million 10 million 1 million Feasibility Study Since 2002 Required Since 2009 Not required Mirroring this legislative amendments, on 2 February 2009, the MIIT issued the new "Administrative Measures on Telecommunications Business Operation Licences" (Order of the MIIT no. 5 of 2009) (the Telecom Licence Administrative Measures). The Telecom Licence Administrative Measures govern the application of telecom licences to operate telecom business in the PRC and repeal in its entirety the previous set of regulations adopted in 2001.

5 Page 3 of 3 Despite the above changes, the existing minimum registered capital of VATBs and equity restrictions for FITEs to engage in BTB are still applicable. Without being able to benefit from the policy developments relating to private enterprises as outlined above, foreign investors are still required to comply with the prescribed equity ceiling of 49% in a FITE that engages in BTB, with at least 51% equity interest being held by the state (i.e. SOEs). What to expect? Thus far, no concrete measure has been promulgated. It would be interesting therefore to see the form of relaxation which the MIIT ultimately adopts: whether the policy in the telecom industry will simply be implemented through internal policy guidelines, or through legislative amendments further lifting the restrictions, including capital requirements and qualification requirements, which private enterprises are subject to insofar as BTB is concerned. As for foreign investors, whether encouraging private enterprises will result in any cooperation between foreign investors and domestic PRC enterprises or other form of innovative structure remains to be seen. 1 Intra-provincial means operations within a province, an autonomous region or a municipality directly under the Central Government. The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication. Herbert Smith, Gleiss Lutz and Stibbe are three independent firms that have a formal alliance. This message is sent by Herbert Smith, 23/F Gloucester Tower, 15 Queen's Road Central, Hong Kong. Tel: asia@herbertsmith.com. 這 個 信 息 是 由 史 密 夫 律 師 事 務 所 發 出 地 址 : 香 港 皇 后 大 道 中 15 號 告 羅 士 打 大 廈 23 字 樓, 電 話 : , 電 郵 :asia@herbertsmith.com Herbert Smith 2010