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The Chinese government is currently finalizing a draft that covers new overseas listing rules.
According to reports, China plans to ban companies from foreign IPOs (initial public offerings) done through an existing loophole. Currently, Chinese tech companies sidestep restrictions using variable interest entities (VIE) to list abroad and receive capital from foreign investors. Now, Beijing wants to stop this practice as part of a broader crusade in addressing concerns over data security.
Earlier this year, ride-hailing giant Didi (NYSE: DIDI) went ahead with an IPO listing in New York in spite of prevailing regulatory concerns. This prompted authorities to effect substantial investigations into Didi over cybersecurity and forestall the deluge of other Chinese firms seeking US public listing. Many affected firms are likely to feel the burn if prevented from these billion-dollar-making ventures.
A Few Things Still Remain Unclear about the Proposed Rules for Companies in China Seeking Foreign IPOs
The Chinese government is currently finalizing a draft that covers new overseas listing rules, that’s according to inside information. Part of this entails preventing companies from using the VIE offshore vehicle method. Tech behemoths such as Alibaba (NYSE: BABA) and Tencent (HKG: 0700) have used the aforementioned VIE within the last decade or so to circumvent foreign investment restrictions and list offshore. However, the new rules would still allow VIE-listings in Hong Kong with regulatory approval.
Another talking point is that companies currently listed in Hong Kong and the US that use VIEs would need to effect regulatory-friendly changes. These include adjusting their ownership structures to be more transparent in regulatory reviews. This is especially so for sectors closed off to foreign investments. Now, Chinese internet tech company ByteDance, reportedly considering going public may find a foreign listing very difficult.
Furthermore, it remains to be seen whether this would mean revamping company shareholders. In addition, it is also still unclear if this proposed development would lead to a delisting of the most vulnerable or at-risk firms. If so, then this could trigger renewed sentiments between China and the US over decoupling – more so in the tech space. However, it is worth noting that since the proposed rules are still under review, they are subject to change.
China Has Been Playing Hardball with Its Biggest Tech Companies for a While Now
Within the past year, the Chinese government has come down hard on the major players in its tech industry. The reason for this is what Beijing deems to be a “reckless” expansion of private capital. The government’s need for more influence over tech heavyweights like Tencent and Alibaba resulted in a series of hefty fines. The ban on VIEs is only Beijing’s most recent effort.
The implications stemming from the VIE ban/restructuring may have far-reaching effects, even beyond well-established players in the field. For instance, many startups may no longer view the structure as viable for tapping capital markets. Inside reports already state that regulators are advising investment banks to stop working on new deals involving VIEs.