Daily Management Review

New Rules Mandate Chinese Firms Getting Chinese Ministry Approval For Offshore Listing


New Rules Mandate Chinese Firms Getting Chinese Ministry Approval For Offshore Listing
A team is to be set up by Chinese securities regulator that will review plans of Chinese companies of launching initial public offerings (IPOs) on foreign exchanges, according to reports quoting information from sources with knowledge of the matter. The purview of the review team will include those companies that use a corporate structure which has led to abuse, according to Beijing,
According to reports, China is also going to make it mandatory for Chinese companies that are seeking to list offshore to get approval from the relevant ministry which would be a deviation from arrangements going on for decades which does not mandate Chinese companies obtaining any formal approval from any authorities in China.
On Tuesday, China said that it has set up plans for strengthening the supervision of all Chinese firms listed offshore which would be sweeping regulatory change that resulted in a sell-off in Chinese companies that are listed in the United States.
This latest announcement from China came after regulators of the country launched a cybersecurity investigation into the ride-hailing giant Didi Global Inc a few days after the company made its public debut in the US.
The team that is being set up by China Securities Regulatory Commission (CSRC) is tasked to mainly lay its focus of Chinese companies that are looking to list overseas using the so-called VIE structure.
The aim of using the VIE structure, which was created two decades ago, is to avoid rules in China that seek to restrict foreign investment of companies operating in sensitive industries such as media and telecommunications. This mode is used by Chinese companies to raise funds overseas via offshore listings.
The new economy companies of China, mainly internet firms, have primarily widely used this method and these companies are generally incorporated in the Cayman Islands and British Virgin Islands and hence are outside of the legal jurisdiction of Chinese authorities.
Using this format, Chinese companies are able to gain greater flexibility to raise capital from offshore sources while avoiding the scrutiny and the lengthy IPO vetting process that have to be faced by companies that are incorporated within China.
According to reports quoting sources, in contrast to the generally softer attitude towards Chinese companies using the VIE structure that has so far been adopted by the CSRC, the authority is seeking to conduct more checks and reviews of such companies.
In order to work out how the review would be done, consultation process with leading local banks have already been started by the regulator, said reports, which also added that that regulator will also seek out feedback from global investment banks in the next few weeks.
According to the new changed process, those Chinese companies that are seeking to get publicly listed in offshore stock exchanges will have to get an approval from ministries supervising its business. For example, an approval from the banking regulator has to be obtained by a fintech firm for getting listed in a foreign land.