Days after go-ahead for VIE structures, Beijing releases ‘negative list’ to tighten grip on overseas IPOs by strategically sensitive firms

  • Firms in industries on the list will have to obtain a waiver from regulators before proceeding with IPOs overseas
  • The negative list ‘will play a bigger role than the CSRC’s registration system’ in companies’ listing plans, Shanghai lawyer says

Beijing will step up the review of overseas fundraising activity by companies in certain industries that are off-limits to foreign investment.

Such companies have used variable interest entity (VIE) structures over the past two decades to list abroad. VIEs typically allow overseas investors to share profits generated from businesses in China based on special arrangements, bypassing laws that otherwise ban investment by foreigners.

Late on Monday, the National Development and Reform Commission (NDRC) and the ministry of commerce, China’s top economic policymaking institutions, published a detailed operating guide and a “negative” list that will govern foreign investment. Firms in industries on the list will have to obtain a waiver from regulators before proceeding with initial public offerings (IPOs) overseas. The list will take effect on January 1, 2022.

The list comes less than three days after the China Securities Regulatory Commission (CSRC) gave its tacit approval to VIE companies.

“The negative list clarifies that some of the VIE businesses are unlikely to be allowed to raise funds offshore, as China takes measures to ensure national and data security,” said Ding Haifeng, a consultant at Shanghai-based financial advisory firm Integrity. “All in all, Beijing will still let companies launch IPOs outside the mainland, but will still stop some of the companies in significant sectors from doing so.”

On Friday, the CSRC announced that it would set up a registration system to govern overseas IPOs and fundraising activity by mainland Chinese companies, ending months of speculation that China would block VIEs from accessing foreign stock exchanges.

The CSRC’s intervention came after an investigation into ride-hailing company Didi Global, which used a VIE structure to complete a US$4.4 billion IPO in New York in late June. The Didi IPO triggered a data security investigation by the Cyberspace Administration of China, which recently culminated with the firm announcing plans to delist in the US and list in Hong Kong.

“The negative list by the planning agency and the commerce ministry will play a bigger role than the CSRC’s registration system in deciding the companies’ listing prospects,” said Gong Zhenhua, a partner at Ronghe Law Firm in Shanghai. “Technically, IPO applicants need to secure the waiver before going through the registration process at the securities regulator.”

The negative list will not be retroactive and will not affect companies that have already listed abroad.

Total foreign ownership in companies on the negative list will be capped at 30 per cent, while single investors will not have more than a 10 per cent share in them. Foreign investors will also be barred from taking part in management and operations of these companies.

Under the VIE structure, foreign investors do not own and manage mainland Chinese businesses, but they are still deemed as key stakeholders.

The policymakers did not specify which areas involving national and data security would trigger reviews, but analysts said that new technology start-ups, ranging from e-commerce and fintech to smart vehicles and biotechnology, which have the potential to drastically change people’s lives through digital technologies, will be closely monitored and their IPO documents will be reviewed with great care.

Most of China’s prospective technology start-ups have received foreign venture funding because of these investors’ bigger appetite for innovative and risky businesses.

About 545 mainland Chinese companies – mostly technology start-ups – had raised funds offshore through VIE structures as of mid-September, according to Guotai Junan Securities.

Author: Daniel Ren, SCMP

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