Business

China strengthens surveillance of companies seeking overseas listings

China has said domestic companies must be approved before they can list abroad if they operate in sectors deemed restricted to foreign investors, creating loopholes for corporations. Its technology groups raise capital in the US without going through domestic regulators.

The National Development and Reform Commission, the state’s economic planning agency, said on Monday that local businesses in sectors restricted on foreign investment must now be approved by the federal government. authorized by the “relevant” government before conducting initial public offerings of shares.

The regulator also said that foreign investors would face a 30% limit on their shares in such Chinese companies upon listing and that they would also be banned from operating and manage them.

“The days of free listing abroad are over,” said Li Chengdong, founder of Dolphin, a consulting firm based in Beijing. Beijing-based consultancy, said “a nod from the Chinese government will be crucial for domestic companies to sell shares abroad”.

The NDRC said Chinese companies in the affected sectors could still raise capital from abroad, and the new rule “created policy space for [these firms] for listing abroad”.

Foreign investors are restricted from investing in certain sectors in China, such as internet companies, but have long used complex legal structures known as profitable entities. variable rate (VIE) to overcome those constraints and raise capital from abroad.

The policy move comes during a tumultuous time for many Chinese startups and follows an announcement from the country’s leading ride-hailing app Didi Chuxing earlier this month that it will delisting from the New York Stock Exchange, formerly preceded with US IPO in June despite Beijing’s protests over data security concerns.

That story not only led to the abrupt end of the US-listed Chinese tech boom, but also cast a shadow over the future of companies structured as VIEs.

Investors and analysts say the new policy has eased concerns that VIE could be banned, preserving a vital source of funding for China’s tech startups.

Li said the policy underscores Beijing’s efforts to attract foreign capital while keeping a tighter grip on sectors deemed of strategic importance.

“The administration is keen to prevent the Didi incident from happening again, but it wants to provide a lifeline for the New York-listed dollar-denominated funds to get out, as they are an important financier for the country. China’s homegrown innovation.”

Some caution about what the overhaul means in practice. A Beijing-based private equity partner said he welcomes the new regulation as it has made things “clearer” but added that there is uncertainty about how public IPOs will work. How will the company that was initially denied permission to list proceed?

“There is a lack of transparency about what the evaluation criteria will look like,” they said. “That worries us the most.”

Additional reporting by Ryan McMorrow

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