Initial share sales in the pipeline will face delays if the guidelines require companies to restructure again Sponsors of initial public offerings of red chips in Hong Kong and New York fear the market could come to a halt if new regulations governing the transfer of mainland assets to overseas shell companies, set to take effect on Friday, are applied retroactively. Among other things, the new rules will establish guidelines on how assets intended for sale to offshore entities should be valued. This is a key provision since domestic critics of the way Chinese companies are listed abroad complain that the job of valuing a firm's assets is often left to its senior management which then buys the assets cheap and sells them on to foreigners at an outlandish profit. The rules will also address concerns about capital flight by requiring firms seeking to list their shares abroad to notify the currency regulator of how the proceeds of an initial offering would be returned to the mainland within 30 days. 'Companies that have not already restructured are dead in the water,' a person familiar with the situation said. Another source said: 'What we need to know is whether companies that have restructured and are ready to go will need to restructure again.' Restructuring a company in preparation for a share sale is a process that lasts months and companies that have to start again would also have to arrange new financial audits. 'It's going to be a desert' if this is the case, with red-chip offerings likely to dry up for the remainder of this year, one banker said. However, H-share offerings in Hong Kong, such as that of Industrial and Commercial Bank of China, one of China's big four banks, which plans to raise about US$19 billion this autumn, would not be affected by the new regulations. In an H-share transaction, a company's assets remain in China. In the past, red-chip offerings were easier to handle than H-share sales. However, under the new regulations, the Ministry of Commerce will have the power to approve or reject the creation of red-chip companies, which are formed by transferring Chinese assets to shell companies usually incorporated in tax havens such as the Cayman Islands and British Virgin Islands. Previously, key approvals were issued by the China Securities Regulatory Commission and the State Administration of Foreign Exchange. Even before they take effect, the new rules have claimed a few casualties. These include a number of solar power companies that had planned to list on the US Nasdaq market this year. Yingli Solar, for example, had hoped to raise up to US$400 million. Because the companies have not completed their restructurings and must abide by the new rules on asset transfers, their share sales have been pushed back to the second quarter of next year at the earliest. Acorn International, the mainland's largest television home-shopping company, is waiting for the new regulations to take effect before filing for a US$200 million Nasdaq offering set to begin this month. It had completed its IPO preparations but did not want to take the risk of having to pull the deal off the market if it found out it had to follow the new regulations, sources said. Planned red-chip sales in Hong Kong that could also be affected include the US$400 million offering of China Heavy Duty Truck, the US$250 million deal of Huiyuan Juice and the up to US$300 million offering of Sino-Japanese joint venture Huahong NEC Electronics. Bankers tried to rush some deals through before this Friday's implementation of the rules but their only success was with New Oriental Education & Technology Group, a private education company that specialises in teaching English. Its US$112 million Nasdaq deal is expected to be completed by mid-week.