China will impose new restrictions on the overseas listing by companies in sectors that are off-limits to foreign investment, a move that could fill a loophole that the country’s tech industry has long used to raise capital in the country. Foreign.
Chinese companies in industries that are prohibited from foreign investment should seek an exemption from a negative list before proceeding to sell shares, the National Development and Reform Commission and the Ministry of Commerce said in a statement on Monday.
Foreign investors in such companies would be prohibited from participating in the management and their total ownership would be limited to 30%, and a single investor would have no more than 10%, according to the list updated as of January 1.
The review represents one of the biggest steps taken by Beijing to intensify scrutiny of overseas listings after ride-sharing giant Didi Global Inc. proceeded with its initial public offering in New York despite regulatory concerns over the security of your data. While regulators did not go so far as to prohibit IPOs by companies that use a structure called Variable Interest Entities (VIEs), the new rules would make the process more difficult and expensive.
“For companies seeking to list under the VIE structure, the move may affect their decision regarding their choice of listing destinations,” said Xia Hailong, a lawyer at the Shanghai-based law firm Shenlun. “Before they had no obstacles to listing abroad, but now they will surely face much tougher scrutiny and the path to overseas IPOs will be much more difficult.”
VIEs have been a constant concern for global investors due to their unstable legal status. Initiated by Sina Corp. and its investment bankers during a 2000 IPO, the VIE framework has never been formally endorsed by Beijing. However, it has allowed Chinese companies to circumvent foreign investment rules in sensitive sectors, including the Internet industry.
The structure allows a Chinese company to transfer profits to an offshore entity, registered in places like the Cayman Islands or the British Virgin Islands, with shares that foreign investors can own.
The requirements apply to new stock listings and will not affect foreign ownership of companies already listed abroad, according to the nation’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 would have to register with the securities regulator. Any company whose listing could pose a threat to national security could not proceed.
Companies using the so-called variable interest entity structure could conduct IPOs abroad after meeting compliance requirements, the securities regulator said, without providing further details.
It is all part of a year-long campaign to curb the skyrocketing growth of China’s internet sector and what Beijing has called a “reckless” expansion of private capital. Cutting VIEs from foreign listings would close a gap that has been used for two decades by tech giants, from Alibaba Group Holding Ltd. to Tencent Holdings Ltd., to bypass restrictions on foreign investment and list abroad.
The crackdown turned Didi’s July IPO into a debacle with stocks plunging after China surprised investors by announcing it was investigating the company. Didi said earlier this month that it would withdraw its US depository shares from the New York Stock Exchange and seek listing in Hong Kong.
Didi fell as much as 3% in US trading on Monday after the Financial Times reported that the company has prohibited current and former employees from selling their shares indefinitely.
The increased scrutiny of Chinese regulators has been echoed by their American counterparts. The Securities and Exchange Commission this month announced its final plan to implement a new law that would force foreign companies to open their books to United States scrutiny or risk being expelled from the New York Stock Exchange and the Nasdaq. within three years. China and Hong Kong are the only two jurisdictions that refuse to allow inspections despite Washington requiring them since 2002.
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