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Reuters, HONG KONG, 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. According to three people familiar with the situation, the China Securities Regulatory Commission’s (CSRC) team would focus on companies seeking to list overseas using structures known as Variable Interest Entities (VIEs). Hundreds of the country’s blue-chip enterprises have been able to list overseas thanks to the VIE framework. find out more Here are the answers to some of the most often asked questions about VIE: WHAT IS THE VIE STRUCTURE AND HOW DOES IT WORK? The VIE structure was established two decades ago to help circumvent Chinese restrictions on foreign investment in sensitive areas like media and telecommunications. In a VIE, a Chinese company establishes an offshore corporation for the purpose of allowing foreign investors to buy stock in the company. According to Jefferies analysts, the offshore firm takes into a series of contracts with the owner(s) of the local Chinese company that operates the business in China to get a 100 percent economic interest in that operation. “This structure is meant for enterprises in fields where China will only award operational licenses to domestic Chinese companies, such as the internet, education, data centers, and media industry,” according to Jefferies analysts. WHAT IS THE PURPOSE OF THE VIE STRUCTURE IN CHINESE COMPANIES? Because direct foreign ownership of Chinese firm shares is limited, the market has seen abroad registered companies use the VIE structure to permit their listing on an overseas stock exchange. Many Chinese technology companies that are listed overseas or seeking an offshore listing have adopted the VIE structure. “This structure allows foreign investors to invest and hold shares in a listed company that is incorporated outside of the United States and operates and owns businesses that would otherwise be subject to foreign ownership restrictions in the relevant place of operation,” said Ivy Wong, Baker McKenzie’s Asia Pacific capital markets practice chair. WHERE DO VIE LISTINGS FIND THEIR REGULATORY FRAMEWORK? In China, there has been no efficient regulatory framework for VIE-structured company listings. Because these businesses are incorporated outside of China, Chinese officials have no direct control over their ambitions to list on foreign exchanges. Such businesses can go public in another country as long as they meet the rules of that particular stock exchange. China issued guidelines on China Depositary Receipts, or CDRs, in 2018, clearing the door for domestic flotation of offshore-listed IT behemoths that are often VIE-structured. Ninebot Ltd, a Chinese e-scooter manufacturer, was the first of its kind to list on Shanghai’s Nasdaq-style STAR Market in 2020. HOW ARE THINGS GOING TO CHANGE UNDER THE NEW RULES? Due to China’s pledges to tighten regulation of them, bankers and investors told Reuters this week that IPOs of Chinese companies in the United States will be difficult, if not impossible, in the immediate future. LinkDoc Technology Ltd, a Chinese medical data company, has scrapped preparations for an IPO in the United States using the VIE structure as the first known casualty of the new restrictions. find out more Scott Murdoch and Kane Wu reported from Hong Kong, and Sumeet Chatterjee and Alexander Smith edited the piece. The Thomson Reuters Trust Principles are our standards./nRead More

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