Chinese companies in sectors prohibited for foreign investment will need an exemption to conduct overseas listings.
China will impose new restrictions on overseas listings by companies in sectors closed to foreign investment, a move that could fill a loophole long used by the country’s tech industry to raise capital abroad.
Chinese companies in sectors prohibited for foreign investment will have to apply for a waiver of a negative list before proceeding with the sale of shares, the National Development and Reform Commission and the Commerce Ministry said in a statement on Monday.
Foreign investors in such companies would not be allowed to participate in the management and their total ownership would be capped at 30%, with a single investor holding no more than 10%, according to the list updated as of January 1.
The overhaul represents one of the biggest moves Beijing has taken to tighten overseas listing controls, after rideshare giant Didi Global Inc. proceeded to its New York IPO despite regulatory concerns over the listing. data security. While regulators have stopped short of banning IPOs by companies using the so-called variable interest entity (VIE) structure, the new rules would make the process more difficult and costly.
“For companies looking to register under the VIE structure, this decision may affect their decision on choosing registration destinations,” said Xia Hailong, a lawyer at Shanghai-based law firm Shenlun. “Previously they had no barriers to listing overseas, but now they will surely face a lot more scrutiny and the path to overseas IPOs will be much more difficult.”
VIEs have been a constant concern for global investors given their precarious legal status. Launched by Sina Corp. and its investment bankers during an IPO in 2000, the VIE framework was never officially approved by Beijing. It has nonetheless enabled Chinese companies to circumvent the rules on foreign investment in sensitive sectors, including the Internet industry.
The structure allows a Chinese company to transfer its profits to an offshore entity – registered in places like the Cayman Islands or the British Virgin Islands – with shares that foreign investors can then own.
The requirements apply to new stock listings and will not affect foreign ownership of companies already listed overseas, according to the country’s economic planning agency.
The move comes days after the China Securities Regulatory Commission on Friday proposed that all Chinese companies seeking IPOs and additional overseas sales of shares should register with the regulator. securities. Any business whose listing could pose a threat to national security would be barred from prosecution.
Firms using the so-called variable interest entity structure would be allowed to pursue IPOs overseas after meeting compliance requirements, the securities regulator said, without providing further details.
It’s all part of a year-long campaign to curb the skyrocketing growth of China’s internet industry and what Beijing has called the “reckless” expansion of private capital. Reducing VIEs on foreign listings would close a gap that has been used for two decades by tech giants Alibaba Group Holding Ltd. at Tencent Holdings Ltd. to bypass restrictions on foreign investment and register abroad.
The crackdown turned Didi’s IPO in July into a debacle with stock plummeting after China shocked investors by announcing it was investigating the company. Didi said earlier this month that he would withdraw his US custodian shares from the New York Stock Exchange and pursue a listing in Hong Kong.
Didi fell 3% in U.S. exchanges on Monday after the Financial Times reported the company banned current and former employees from selling their shares indefinitely.
The increased oversight by Chinese regulators has been echoed by their US counterparts. The Securities and Exchange Commission this month announced its final plan to put in place a new law that requires foreign companies to open their books to scrutiny from the United States, or face eviction from the Stock Exchange. New York and Nasdaq within three years. China and Hong Kong are the only two jurisdictions that have refused to allow inspections despite Washington’s demands since 2002.