Chinese Companies in Negative List Sectors Face Limits on Overseas IPOs

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Wall Street Photo: AFP

Foreign listings of Chinese companies in sectors closed to foreign investment will become difficult or less favored following new rules for overseas IPOs that were unveiled alongside the latest negative list market access, analysts said Tuesday.

Monday’s release of the annually revised negative list for foreign investment quickly grabbed the headlines as the country shortened the list for the fifth year in a row.

Of note is an attempt to close a regulatory loophole, with an addition to the Explanatory Notes of the negative list that requires domestic companies in sectors designated as closed to foreign investment to apply for review and approval by regulators. before registering shares abroad.

The new regulation, which comes just days after the country released draft rules for overseas IPOs of domestic companies, is seen as strengthening oversight of overseas listings through entities. variable interest rate (EDV), a structure that domestic internet companies have long relied on for overseas stock offerings, according to market watchers.

VIEs have been used to circumvent foreign ownership restrictions in industries deemed sensitive, and the new rules are likely to complicate such overseas listings, Hong Hao, head of research and strategist in China, told The Global Times on Tuesday. chief at the Bank of Communications International, citing data handling, among other things, concerns about these listings.

Foreign investors are not allowed to participate in the operations and management of companies, according to the new regulations, which also set ceilings on the shareholding ratios of foreign investors, the National Development and Reform Commission said on Monday. (NDRC) in a statement posted on its website.

The holdings of individual foreign investors and their affiliates should not exceed 10% of the total number of shares of the company, while the combined holdings of all foreign investors and their affiliates should be less than 30%, according to the press release.

With regard to companies from sectors falling on the negative list and trading their shares both at home and abroad, the holdings of foreign investors in domestic and foreign listings will be combined when complying with the participation limits.

Among the sectors banned in the annual updated list are rare earth mines, telecommunications, news agencies and compulsory tutoring institutions.

The new guidelines target overseas listings of companies operating domestically, thereby closing the overseas funding gap for domestic companies, Wu Jinduo, head of fixed income at the Global Times, told the Global Times on Tuesday. Great Wall Securities Research Institute.

Companies that list their shares overseas through VIEs have proven to be “shell companies” in overseas markets, Wu said, noting that the new regulations are indicative of the country’s support for companies to opt for domestic listings. and foreigners in a law-abiding framework. way.

Speculative firms that take advantage of foreign listings for speculative gains will not be supported, she continued.

Domestic companies with VIE structures that meet compliance requirements could still float abroad after filing a case with the relevant authorities, on the assumption that they are complying with Chinese laws and regulations, according to the draft rules. for IPOs abroad announced Friday evening by the securities regulator.

The new rules ban overseas listings seen as a threat to national security, while defusing problems with a total ban on overseas IPOs based on VIEs.

This clarifies the regulatory mindset governing overseas listings following the controversial introduction of the Didi ridesharing platform on the New York Stock Exchange at the end of June, to decide to withdraw from the listing around five months. later, in the middle of a cybersecurity investigation.

Platform companies involving national information, finance and data security might face hurdles when it comes to overseas IPOs, Wu commented.

Hong said such listings will become difficult and it is increasingly unnecessary for domestic companies to seek out equity offerings in foreign markets, citing valuations and liquidity as the main factors that channel listing plans. to national markets.

China’s regulatory change is likely to accelerate the trend for Chinese companies listed in the United States to return which are also facing tightening US regulations. Failure to share audit working papers could expose companies to delisting from U.S. stock exchanges in 2024, analysts said.

Zhihu, a Quora-like question and answer forum in Chinese, intends to list its shares in Hong Kong in the near future or submit its IPO documents in June 2022, Chinese newspaper Jiemian reported. this week-end. Zhihu said he had not heard of the news, media reported.

Zhihu debuted on the New York Stock Exchange in late March and its shares were down 42.95% at Monday’s close.

Earlier this month, the Beijing cyberspace regulator, under the leadership of the Cyberspace Administration of China, summoned Zhihu for posting illegal information and demanded “immediate rectifications” on the basis of the Law on the country’s cybersecurity.

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