China targets offshore IPO structure, to require ministry approval – sources

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(Reuters) – China’s securities regulator is setting up a team to review Chinese companies’ plans for overseas initial public offerings (IPOs), sources with knowledge of the matter said, including those using a corporate structure that Beijing says has led to abuse.

Chinese companies seeking to register overseas will also need approval from the relevant ministry, the sources told Reuters, breaking a decades-old deal that did not require them to seek the formal green light. Chinese authorities.

Details are the first to emerge after Beijing on Tuesday announced plans to tighten supervision of all overseas-listed Chinese companies, a sweeping regulatory change that sparked a massive sell-off of Chinese stocks listed in the United States.

The announcement came after Chinese regulators launched a cybersecurity investigation into ride-sharing giant Didi Global Inc just days after it went public in the United States.

The China Securities Regulatory Commission (CSRC) is setting up a team that will primarily target companies seeking to list overseas using the so-called VIE structure, said three people with knowledge of the matter, who have refused to give their name because of the sensitivity of the change.

The VIE structure was created two decades ago to bypass rules restricting foreign investment in sensitive sectors such as media and telecommunications, allowing Chinese companies to raise funds abroad through offshore listings.

It has been widely adopted by businesses in China’s new economy, primarily internet companies, which are typically incorporated in the Cayman Islands and British Virgin Islands and therefore fall outside of Beijing’s legal jurisdiction.

It gives companies more flexibility to raise capital overseas, while bypassing the scrutiny and lengthy IPO verification process that locally incorporated companies must go through.

The CSRC, which had taken a softer attitude towards Chinese companies using the VIE structure, is now seeking to carry out in-depth checks, two people said.

The regulator has already launched a consultation process with major local banks to determine how the review would be carried out, one said, adding that it would also seek comments from global investment banks in the coming years. weeks.

Under the new process, a company seeking to register overseas will need to obtain approval from the ministries overseeing its activities, one of the sources said. A fintech company, for example, would need the green light from the banking regulator.

The CSRC did not immediately respond to a request for comment.

The Wall Street Journal reported on Thursday https://www.wsj.com/articles/chinas-cyber-watchdog-to-police-chinese-overseas-listings-11625742254?mod=latest_headlines, citing people familiar with the subject, that the Cyberspace Administration of China is playing a leading role in Beijing’s efforts to regulate Chinese companies listed in the United States.

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Bankers say the new measures are expected to significantly delay the listing process and add uncertainties.

Beijing, however, says they are needed to crack down on illegal activities in the securities market and punish fraudulent securities issues, market manipulation and insider trading.

“Due to shortcomings in the (regulatory) system, the cost of committing securities crimes has been relatively low,” CSRC chairman Yi Huiman told Xinhua News Agency.

“The illegal activities of listed companies, including financial fraud, insider trading and market manipulation, are on the increase.”

Looming verifications have already caused concern, with Chinese medical data group LinkDoc Technology on Thursday shelving its plans for an IPO of US $ 211 million using the VIE framework.

His move is likely to be followed by others, analysts said, although they noted that listings in the United States were not prohibited.

(Reporting by Julie Zhu in Hong Kong, Zhang Yan in Shanghai and Cheng Leng in Beijing; edited by Sumeet Chatterjee and Alexander Smith)


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