China-Securities-Regulatory-Commission-CSRC
(China Securities Regulatory Commission)

China to tighten rules on offshore IPOs

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Over the Christmas holiday weekend, China’s securities watchdog unveiled draft rules to govern overseas share sales by the country’s firms. Chinese companies set up as variable interest entities (VIEs) seeking IPOs in offshore markets would have to register with the securities regulator and meet compliance rules, according to a draft of a new regulation released by the China Securities Regulatory Commission (CSRC) on Friday (Dec. 24).

The regulation also allows mainland-incorporated firms to directly list overseas without the need for a VIE if they meet the requirements. Many Chinese companies have used  the VIE structure to list in the U.S.

“Domestic enterprises issuing and listing overseas shall strictly abide by laws, regulations and relevant provisions on national security such as foreign investment, cybersecurity and data security, and earnestly fulfill the obligations of national security protection,” the regulator said in its proposal.

The CSRC also said it would only assess the truthfulness, accuracy and completeness of submitted documents before giving applicants a green light for offshore listings.

The draft rules are open for public feedback until January 23.

On Monday (Dec. 27), two major Chinese authorities, the National Development and Reform Commission and the Ministry of Commerce , took additional steps to clarify rules related to the country’s “negative list.”

Companies that are doing business within the scope of the “negative list” which includes sectors usually banned from foreign investment, such as publishing and telecommunication, will need to seek a waiver if they want to go for an IPO overseas.

Foreign investors in such companies would be forbidden from participating in management and their total ownership should not exceed 30%, with a single foreign investor holding no more than 10% of a company’s total shares, according to the updated list effective Jan. 1.

The announcements come after weeks of speculation about when and how Beijing might tighten screws on foreign IPOs. They also come after Didi Global Inc., a $39 billion company that is China’s answer to Uber,  proceeded with its its June IPO on the New York Stock Exchange despite regulatory concerns over the security of its data.

DIDI
(Didi’s shares now more than 60% below their IPO price. They fell $0.30 or 5.4% Monday to $5.30, giving the firm a market capitalization of $25.6 billion, according to FactSet)

Authorities at the time accused the Chinese ride-hailing giant of breaking privacy laws and posing cybersecurity risks. In the weeks after the IPO, China’s internet regulator proposed that companies with data on more than 1 million users will be subjected to regulatory screening by Beijing authorities before listing overseas.

Didi said earlier this month that it would “immediately” start the process of delisting from the New York Stock Exchange and pursue a listing in Hong Kong.

The heightened scrutiny by Chinese regulators has been echoed by their U.S. counterparts. Earlier this month, the US Securities and Exchange Commission finalized rules that would allow it to delist from NYSE and Nasdaq foreign firms that refuse to open their books to US regulators within three years.

More signs of continuing tensions between the United States and China?