Staff of Reuters Read for 4 minutes Reuters, July 8 – According to individuals familiar with the topic, China’s securities regulator is forming a team to examine Chinese businesses’ plans for international initial public offerings (IPOs), especially those that utilize a corporate structure that Beijing claims has led to misuse. According to Reuters, Chinese companies seeking to list overseas will also need clearance from the relevant ministry, breaking a decades-old agreement that did not require them to obtain formal approval from any Chinese authority. The facts are the first to emerge since Beijing announced on Tuesday that it intends to enhance control of all Chinese companies listed abroad, a major regulatory shift that sparked a sell-off in Chinese stocks listed in the United States. That announcement comes just days after Chinese officials opened a cybersecurity inquiry into Didi Global Inc, the world’s largest ride-hailing company. According to three people familiar with the topic who declined to be identified due to the sensitivity of the change, the China Securities Regulatory Commission (CSRC) is forming a team that will focus on companies trying to list overseas using the so-called VIE structure. The VIE structure was designed two decades ago to get around restrictions on foreign investment in sensitive industries like media and telecoms by allowing Chinese enterprises to raise money through offshore listings. It has been widely adopted by China’s new economy companies, mostly internet corporations, which are generally established in the Cayman Islands and British Virgin Islands and hence outside of Beijing’s legal jurisdiction. It allows businesses to acquire capital in a more flexible manner while avoiding the rigorous and lengthy IPO vetting process that locally formed businesses must go through. According to two of the persons, the CSRC, which had previously taken a softer stance toward Chinese enterprises employing the VIE structure, is now looking to do extensive examinations. According to one source, the regulator has already begun a consultation process with prominent local banks to determine how the assessment will be conducted, and it will also seek views from global investment banks in the coming weeks. According to one of the individuals, a company seeking to list overseas would need to obtain approval from ministries overseeing its operations. The banking authority, for example, would have to approve a fintech company. A request for comment from the CSRC was not immediately returned. According to bankers, the additional rules will drastically slow down the listing process while also adding uncertainty. Beijing, on the other hand, claims that they are required to combat illicit activities in the securities market, such as fraudulent securities issuance, market manipulation, and insider trading. “The cost of committing securities-related crimes has been relatively low due to the flaws of the (regulatory) system,” CSRC chairman Yi Huiman told the Xinhua news agency. “Listed company illegal acts such as financial fraud, insider trading, and market manipulation are on the rise.” The looming checks have already caused concern, with Chinese medical data company LinkDoc Technology scrapping plans for a $211 million IPO in the United States using the VIE structure on Thursday. Analysts believe that its decision will be followed by others, however they point out that U.S. listings are not prohibited. Julie Zhu in Hong Kong, Zhang Yan in Shanghai, and Cheng Leng in Beijing contributed reporting; Sumeet Chatterjee and Alexander Smith edited the piece./n
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