China Proposes New Rules for Domestic Firms Looking to Float Overseas IPOs

UTC by Tolu Ajiboye · 3 min read
China Proposes New Rules for Domestic Firms Looking to Float Overseas IPOs
Photo: Depositphotos

China says companies that operate in sectors under its ‘Foreign Investment Negative List’ have to secure regulatory clearance for overseas IPOs.

The government of China has introduced rules concerning Chinese companies that want to float their IPOs overseas. According to reports, Chinese domestic firms will now have to secure clearance from regulators to list shares outside the mainland.

The China Securities Regulatory Commission (CSRC) issued a proposal with regard to the development, which read:

“Domestic enterprises issuing and listing overseas shall strictly abide by laws, regulations and relevant provisions on national security such as foreign investment, cybersecurity and data security, and earnestly fulfill the obligations of national security protection.”

The new rules would most especially pertain to Chinese firms in sectors that are off-limits to foreign direct investment. Such sectors include internet news and publishing.

Furthermore, the National Development and Reform Commission (NDRC) provided an update to the annual “Foreign Investment Negative List.” Other prohibited sectors include compulsory education institutions and rare earth minerals.

China is Tightening Grip on Companies Regarding Overseas IPOs

There is increased scrutiny from the Chinese government over its domestic companies generating billions of dollars in US public markets. In fact, less than six months after its IPO, ride-hailing giant Didi announced plans to delist from the New York Stock Exchange. Instead, the company stated that it would relist either in Hong Kong or mainland China.

The CSRC’s proposal also stated that it would prevent companies from conducting IPOs if they were threats to national security. Furthermore, it also stated that companies might have to divest some assets to negate harmful effects.

The new rules also state that foreign investors cannot partake in the day-to-day affairs including operation and management. In addition, the holdings of these foreign investors should not exceed 30% of the entire stake at any point in time.

Despite the seemingly stringent requirements outlined, the proposed rules are still under review, and subject to public comment. Winston Ma of New York University called attention to this by saying:

“The details of rule enforcement still needs further observation, especially the supervisory scope of other related ministry regulators, in addition to the CSRC.”

However, the period for issuing public comment ends on January 23rd. Also, because of the increasing tension between China and the US, Washington enacted audit rules that could affect Chinese firms.

China’s Ministry of Commerce Weighs In

China’s Ministry of Commerce says the new proposed rules are not supposed to roil foreign investors further. Instead, the agency says this is a gesture by the Chinese government to ease some rigid policies. It also suggested that China is not looking to ban overseas IPO listings altogether. According to the Ministry in a separate statement:

“China is exploring ways to allow companies in sectors off-limits to foreign investment to list overseas under certain conditions, expanding investment channels for foreign investors.”

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