NewProposed rules on variable interest entities deter HK listing
New regulations may see variable interest entities face restrictions in floating in city and encourage them to set up in Shanghai instead
Proposed regulations on variable interest entities (VIEs) in a new draft of China's foreign investment law may put more obstacles in the way of companies with such structures seeking to list in Hong Kong while encouraging e-commerce firms to incorporate in the Shanghai free-trade zone, lawyers and accountants said.
Chinese companies have been using VIE structures to list overseas, allowing foreign capital to get around Beijing's foreign ownership restrictions on some sectors, such as the internet industry. Alibaba Group Holding, Tencent Holdings and Baidu all use such structures.
"In some cases where [China] has imposed shareholding restrictions on foreign investments in certain industries, the VIE structures may shield the shareholders in real control," said Roy Lo Wa-kei, a deputy managing partner of accounting firm Shinewing. "The proposed law would require more disclosure.
"The government could gather more data from VIE firms through the new regulation. But the risks for the companies would be they might have to reveal any practice of non-compliance covered by the VIE structures."
The draft of the foreign investment law published by the Ministry of Commerce would legitimise VIE structures but also require companies using such structures to prove they were ultimately controlled by Chinese investors, otherwise they would be treated as foreign-invested enterprises and might fall foul of a "negative list" of industries with foreign investment restrictions.
The law is now in a consultation period, with the deadline for submitting comments on February 17.