Hong Kong: On Friday 25 December 2021, Chinese securities regulators introduced newly written regulatory drafts to tighten their grip on overseas listings from domestic firms related to Initial Public Offerings (IPO), based on national security. The rules are aimed at banning listings and reviewing IPO filings in a bid to close several securities regulation loopholes in regards to decoupling from America. But there are many other reasons for the new rules.
The plan is for reviews of these IPOs to fall under the jurisdiction of foreign investment security and cybersecurity regulations groups that are planning to police the sector. In the face of several questions from the local media, the securities regulator tried to assure everyone that it isn’t a plan to ban all overseas listings for variable interest varieties, which is a structure that is routinely used by tech firms to find overseas investment. If firms adhere to the new rules and the listings meet the requirements, there should be no issue.
Chinese Regulatory Framework Updates
The original law that regulates overseas listings was first created in 1994. The newly drafted rules represent an upgraded version of the Chinese regulatory framework that has governed overseas listings for nearly two decades. The upgrades are being implemented at a time when rising geopolitical tensions and new technological evolution is rife across China and the Western world.
The Chinese Securities Regulatory Commission (CSRC) in conjunction with the China cabinet and certain departments of the State Council is looking to regulate domestic firms who want to make listings abroad. They will now have to undergo tight screening processes and heightened supervision if the businesses are involved in these practices.
Certain State Council departments are now asking said firms to spin off domestic business or assets. Alternatively, they might be asked to take measures to quill or even halt the impact of their overseas listings, so as not to affect national security.
Understanding the New Regulations on Overseas Listings
There are a total of 5 chapters in the new regulatory draft. They all aim to enact heightened supervision for activities relating to overseas listings, directly or indirectly via some kind of unified filing management that is yet to be confirmed. The drafts also highlight the need to coordinate regulatory mechanisms and all manner of clarified legal responses, alongside other contents.
The ban on VIE structures from Chinese regulators was a response to the recent delisting of Didi on the New York Stock Exchange that happened in early December. The CSRC stated that any Chinese firms that have a VIE structure can list abroad if their actions meet compliance requirements in the new Chinese regulatory drafts.
The CSRC pointed out that the improvement of the regulatory framework is not simply a case of them tightening their policies on overseas listings, but is more about preparing the nation properly for opening up to foreign investment.
The CSRC recently stated that “Looking to the future, China’s direction of opening-up will not change, neither will its attitude of supporting companies using these two resources.” They also went on to discuss the need to respect a company’s responsibility and ability to make their own decisions on the listing markets they choose so they can make viable and legal choices.
China Remains Confident for Future Opening-Up
It has become evident that China has heightened confidence in regards to opening up and that its capital market will remain solid and sturdy like always. They want to be seen to encourage trustworthy companies that adhere to the new drafts to compliantly list overseas.
With such regulations in place, it will give confidence to those listing and will actually improve the overall quality of the listings. The system aims to be more open than ever before, especially in terms of obtaining and applying for administrative licenses for overseas listings with added record management.
Promoting cross-border auditing and coordinated supervision is being actively promoted by China, according to the CSRC. Establishing mechanisms for sharing information with foreign securities commissions is essential to strengthening regulatory relationships across the world.
It’s also ideal for cracking down on illegal financial activities with a major focus on financial fraud. Companies that breach security with their overseas listings will hopefully become a thing of the past.
Seeking Common Ground with US Regulators
Finding the common ground between Chinese and US securities regulators and putting their differences aside is an important part of the new drafts. There are several consensuses that are yet to be reached between the US and China in regards to the opening of audit working papers.
Hopefully, the new rules will help to cement more cohesion between the two mega powers. They aim to increase the cost of violations as we saw with the Didi delisting and the Luckin Coffee scandal.
It’s evident that local Chinese firms operating overseas are a massive part of China’s
globalization plans and the opening-up of the markets. Making the Chinese equity market a top-notch global investment fund-raising location is also a massive plus factor regarding the drafts. It will be interesting to see how this pans out over the next few months as China attempts to keep a grip on overseas listings while still trying to encourage investment.