How far will Beijing go in its oversight of overseas-listed Chinese stocks?
- Chinese regulators are weighing greater oversight of so-called variable interest equity structures, or VIEs
- VIEs have been a popular path for some of China’s biggest tech names to go public in the US
For more than two decades, Chinese technology companies have used a unique corporate structure to skirt Beijing’s restrictions on foreign investments and access overseas capital markets.
“I think it would be quite draconian or dramatic if the government were to completely ban the VIE structure. The use of the VIE structures has been going on for many years,” said Dickson Ng, a partner at the law firm Eversheds Sutherland in Hong Kong.
Under a VIE structure, companies form an overseas entity – usually incorporated in a jurisdiction such as the Cayman Islands or the British Virgin Islands – and share the profits or economic benefits of the onshore business with foreign investors who would normally be restricted in how they could directly invest in a mainland company.
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The China Securities Regulatory Commission (CSRC) is considering requiring Chinese companies who use a VIE to seek approval before going public in the US or Hong Kong, Bloomberg News reported on Wednesday, citing people familiar with the matter.
“[Chinese regulators] might make it a case where they want to extend their jurisdictional coverage of such offshore companies,” Ng said. “If a substantial part of your business is in China, notwithstanding that your holding company is incorporated offshore, you would still need to seek consent.
“Otherwise, there might be repercussions for your business in China. It is one of the multiple measures that regulators might be considering.”
Typically, mainland-incorporated firms have to apply for permission from the CSRC to list their shares in Hong Kong, but VIE-structured firms have not been required to do so, according to deal makers.
China’s rethinking of its rules on companies listing overseas comes against the backdrop of ongoing tensions with the US and a crackdown on the country’s high-flying tech sector, where some of the industry’s biggest names have attracted foreign capital and prestige by listing in New York via a VIE structure.
In its prospectus, Didi warned that “uncertainties in the PRC legal system” could cause regulators to find its VIE contractual agreements and business to “be in violation of any existing or future PRC laws or regulations”.
One company with a VIE structure, LinkDoc Technology has halted its plans for an upcoming US listing, Reuters reported on Thursday, citing people familiar with the matter.
The Beijing medical-data solutions provider declined to comment when contacted by the Post on Thursday.
“The reasons for Chinese tech/growth companies still going for a US listing are not hard to understand: higher valuation, easier investor education, global reputation and the ability to raise US dollars,” Jefferies analysts Edison Lee and Chi Tsai said in a research report on Wednesday.
“Therefore, we see every motivation for China to limit overseas listings going forward, especially those using the VIE structure.”
The “billion-dollar question” for market participants, companies and foreign investors is how far Beijing will go to limit VIEs or overseas listings, according to Stephanie Tang, head of private equity for greater China at the law firm Hogan Lovells.
“It’s really not to anyone’s benefit if the government suddenly shuts down the structure or the US IPO access,” Tang said.
“The government will have to observe the market reaction before making any conclusive decisions on how to deal with that. The market participants hope it will take a reasonable, rational approach to this.”
Additional reporting by Martin Choi