China to Tighten Foreign IPOs, May Ban Some on National Security

by BLOOMBERG

CHINA plans to tighten scrutiny of domestic firms’ overseas share sales and ban those whose listing could pose a national security threat.

All Chinese companies seeking initial public offerings and additional share sales abroad would have to register with the China Securities Regulatory Commission, according to a consultation paper it released late Friday.

Under the proposals, firms whose overseas listings could threaten national security are barred from share sales, and companies whose activities raise cybersecurity concerns would go through security reviews.

“Improving the oversight of firms listing abroad comes against the backdrop of opening capital markets, and the regulations are to facilitate more healthy, sustainable and longer-term development,” the CSRC said. “The direction of opening up remains intact.”

The changes would be the latest step by the government of President Xi Jinping to crack down on overseas listings following the New York IPO of ride-hailing giant Didi Global Inc., which proceeded despite regulatory concerns. Since then, authorities have moved to halt the flood of firms seeking to go public in the U.S., shuttering a path that’s generated billions of dollars for technology firms and their Wall Street backers.

Didi’s listing in the U.S. came just as Xi was looking for ways to control the vast reams of data held by China’s tech giants, in part to ensure the ruling Communist Party spreads the wealth beyond a small circle of billionaires — a campaign aimed at creating “common prosperity.”

China’s heightened regulatory scrutiny has been echoed by moves in the U.S. The Securities and Exchange Commission has halted pending IPOs by Chinese companies until full disclosures of political and regulatory risks are made, warning investors may not be aware they are actually buying shares of shell companies instead of direct stakes in businesses.

Firms that are involved in major disputes back home over assets or core technology will also be banned from overseas listings, the regulator said. The CSRC would also require firms in certain sectors to obtain approval from industry watchdogs before registering with the securities regulator.

Companies using the so-called variable interest entities (VIE) structure would be allowed to pursue IPOs overseas after meeting compliance requirements, according to the CSRC.

The CSRC is seeking public opinion on the draft rules until Jan. 23.

Other key points in the consultation paper included:

  • Authorities may order firms to divest domestic assets to prevent their overseas IPO from harming national security
  • Firms that provide key data and personal information in offshore markets shall comply with related regulations
  • Companies that don’t comply with registration rules could face fines of up to 10 million yuan or suspension of business and license
  • The CSRC will grant an unspecified grace period to firms already listed overseas in terms of complying with new requirements