China unveils sweeping rules for foreign IPOs in the wake of Didi controversy


The Nasdaq Golden Dragon China Index dropped 1.1% overnight despite another all-time high for US shares, while the Hang Seng Tech Index slipped as much as 1.6% in Hong Kong trading yesterday, dragged down by losses in Tencent Holdings Ltd and Meituan.

BEIJING: China has unveiled sweeping regulations governing overseas share sales by the country’s firms, taking one of its biggest steps to tighten scrutiny on international debuts in the wake of Didi Global Inc’s controversial listing.

The regulations, issued by the country’s securities watchdog, commerce ministry and top economic planning agency over the past week, cast more uncertainty over the prospects for overseas initial public offerings (IPOs) that had proceeded virtually unchecked for two decades.

The Nasdaq Golden Dragon China Index dropped 1.1% overnight despite another all-time high for US shares, while the Hang Seng Tech Index slipped as much as 1.6% in Hong Kong trading yesterday, dragged down by losses in Tencent Holdings Ltd and Meituan.

Chinese firms in industries banned from foreign investment will need to seek a waiver from a negative list before proceeding for share sales, the National Development and Reform Commission and the Ministry of Commerce said in a statement on Monday.

Overseas investors in such companies would be forbidden from participating in management and their total ownership would be capped at 30%, with a single investor holding no more than 10%, according to the updated list effective Jan 1.

Meanwhile, the China Securities Regulatory Commission proposed last Friday that all Chinese companies seeking IPOs and additional share sales abroad would have to register with the securities regulator.

Any company whose listing could pose a national security threat would be banned from proceeding.

The overhaul represents a major step taken by Beijing to tighten scrutiny on overseas listings, after ride-hailing giant Didi proceeded with its New York IPO despite regulatory concerns over the security of its data.

While regulators stopped short of a ban on IPOs by companies using the so-called Variable Interest Entities (VIE) structure, the new rules would make the process more difficult and costly.

It means that Chinese firms seeking to list abroad via VIEs may need to complete the compliance procedure with the commerce and economic planning ministries in addition to a cybersecurity review, before getting the clearance under the CSRC’s proposed registration process, said Winston Ma, adjunct professor of NYU Law School and author of “The digital war – How China’s tech power shapes the future of AI, blockchain and cyberspace.”

The new edicts on VIEs and listings indicate China’s efforts to rein in its massive Internet sector isn’t abating.

After cracking down on areas from e-commerce to financial technology, after-school education, gaming and online content, Beijing’s attention had turned to the risks posed by tech startups as they seek access to foreign capital in a bid to expand.

In addition to the new rules on VIEs, regulators had previously proposed that firms with at least a million users undergo a cybersecurity review before going public overseas.

“The Commerce Ministry, as the enforcement agency for foreign investment-related laws and the leading ministry for the existing VIE rule issued a decade ago, may emerge as an important regulator for Chinese VIEs seeking offshore IPOs,” said Ma.

VIEs have been a perennial worry for global investors. — Bloomberg

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