China publishes new rules for overseas IPOs of domestic companies

The China Securities Regulatory Commission (CSRC) issued two draft rules for consultation, on 24 December, in order to “promote lawful use of overseas capital markets by domestic companies to achieve sound development and regulate overseas securities offering and listing activities by domestic companies in direct or indirect form”.

The CSRC is proposing to revise the existing Special Provisions of the State Council Concerning the Overseas Securities Offering and Listing by Limited Stock Companies (No. 160 Order of the State Council) through the issue of new administration provisions and measures:

  • The Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies
  • The Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies.

According to the Provisions, the CSRC plans to establish a filing-based regulatory system to cover both direct and indirect overseas listings of Chinese companies. That means all Chinese companies seeking overseas initial public offerings (IPOs), directly or indirectly, will be required to file with the CSRC.

Under the Administration Provisions, a filing-based regulatory system will be introduced to cover both direct and indirect overseas offering and listing. An inter-departmental regulatory cooperation mechanism will be established to coordinate effectively with other mechanisms such as security reviews, and the regulatory authorities will step up cross-border cooperation with overseas counterparts by sharing filing information as well as strengthening enforcement cooperation.

To support the opening up of capital markets and growth of companies, the Administration Provisions specify that where employee stock ownership plans (ESOPs) are to be deployed, direct overseas offering and listing by domestic companies can take the form of private placement to eligible domestic investors, and that full circulation of domestic unlisted shares should also be facilitated. Currency restrictions on fund-raising and dividend payments are also to be relaxed to enable companies to raise funds in RMB in overseas markets.

The Administration Provisions also set out the legal liabilities of breaches, such as failure to meet filing obligations or fraudulent filing, with the aim of increasing the cost of violations.

The Measures prescribe the scope of activities subject to the filing requirement, the relevant criteria for determining whether an activity falls within the scope, the entities with filing obligations and the procedures for making filings. They also set out the requirements for companies to report material events so as “to enhance interim and ex-post supervision on a continuous basis” and the filing requirements for overseas securities firms that provide services for overseas securities offering and listing by domestic companies.

The CSRC said: “China stays committed to further opening-up of capital markets, as well as supporting domestic companies in seeking overseas listing and utilising market resources both at home and abroad in compliance with relevant laws and regulations. The new rules aim to promote better compliance and development. We welcome valuable public comments for our further improvement of these two drafts. The rules will be implemented timely after the completion of consultation and due legislative procedures.”

On 27 December, China’s National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly issued updated versions of two ‘negative lists’, which prescribe the industries where foreign investment will either be prohibited or restricted.

The 2021 National Negative List has removed two restricted industries, cutting it from 33 to 31, while the new 2021 Free Trade Zone Negative List removed three items, cutting it from 30 to 27. Both took effect on 1 January, replacing their respective 2020 versions, but the NDRC also added a provision regarding offshore listings of Chinese companies.

The notes explain that Chinese companies engaged in one of the fields prohibited from receiving foreign investment must undergo a review and approval process by the government before they can list on a stock market overseas. China’s securities regulators and relevant authorities will implement precise management of overseas listing and financing of these domestic enterprises.

To address the rising concerns over China’s ban on so-called variable interest entity (VIE) structures following the delisting of Chinese ride-hailing platform Didi Chuxing from the New York Stock Exchange in early December, CSRC said that Chinese companies with VIE structures that meet compliance requirements can list abroad but will be required to register their plans with the regulator to ensure they comply with Chinese laws.

VIE structures have enabled Chinese companies to set up an offshore entity for overseas listing purposes that allows foreign investors to buy into the stock while avoiding Chinese rules restricting foreign investment in a number of sensitive industries, such as media and telecommunications. Most offshore-listed Chinese tech firms, including Alibaba Group and, have employed this structure.

In its announcement, the CSRC said Chinese regulators respected the choices made by companies on listing locations and that the rules would not be applied retroactively. It stressed that improving the supervision framework did not represent a tightening of policies involving overseas listing but was a necessary step in facilitating China’s systematic high-level opening-up.

Last June, Didi secured a USD4.4 billion initial public offering on the NYSE, but less two weeks later China’s Cyberspace Administration announced it was investigating the firm and two smaller transportation platforms for potential national security violations. China now requires any platform with more than 10 million users to undergo a state security review to receive permission to list abroad.

In December, Didi announced that it would delist from the NYSE and instead move to the Hong Kong Stock Exchange. The move came just hours after the US Securities and Exchange Commission said it was adopting amendments that would require foreign companies to submit to open-book audits if they list in the US. The new rules were widely seen as an effort to gain insight into the operations of Chinese firms, which the SEC said it had been unable to audit satisfactorily since 2007.

Chinese companies looking to secure overseas IPOs may find that Hong Kong will be more advantageous. US IPOs will face more filing requirements and security review processes at home, as well as the risk of being delisted by US regulators. Although Chinese domestic companies seeking to list in Hong Kong will be subject to a cybersecurity check if ‘national security’ issues are flagged, listing in Hong Kong will still subject to less scrutiny than listing abroad.

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