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How the listing ban on foreign stock exchanges will be implemented
The Chinese government continues to tighten the rules for technology companies. The authorities have introduced a complete ban on listing on stock exchanges in other countries. Previously, the IT business used the option of IPO on foreign stock markets through the mechanism of VIE – variable interest in other companies. This option allowed Chinese firms to raise capital from foreign investors.
A package of listing restrictions is still under development. Meanwhile, companies that enter the market through VIEs are allowed to do so through an IPO on the Hong Kong stock exchange. However, such firms must first obtain official permission from the regulatory authorities. In addition, firms that have previously placed shares through VIE will have to change their business structure. This decision was dictated by the intention to make the conduct of business activities in the country more transparent and in a way which complies with all the regulations of Chinese law. First of all, the rules are aimed at those sectors of the market that are not accessible to foreign investors. Such wording from the government sheds little light on how exactly the adjustments will be made to the structure of companies. Experts single out two ways of implementing this task – revision of the list of shareholders or delisting from stock exchanges in other countries. The second option is quite radical and can be used for companies that are of interest to the Chinese authorities.
The innovations can be seen as part of a strategy to keep China’s technology industry growing intensively. In addition, Beijing opposes such active distribution of private capital. Experts believe that the ban on listing through the VIE mechanism may close for large technology corporations a loophole that they have successfully used for almost 20 years. For example, such giants as Alibaba and Tencent used the VIE scheme to enter foreign exchanges. This way they bypassed the strict restrictions imposed by the Chinese government on foreign investment. In addition, corporations registered offshore, which reduced the tax burden and the scrutiny of the authorities.
Chinese regulators have been engaged in an inspection of Didi, after which they sent a document demanding a detailed plan for delisting from the New York Stock Exchange. Such a decision was explained by the high risk of leakage of confidential information, which is possible when operating on foreign trading floors. The company can satisfy the requirement of the regulators through direct privatization or by changing the status of the business from public to private.
Experts call the decree on delisting a kind of punishment for Didi for going public in the United States, despite recommendations from the Chinese government not to do so.