China’s securities regulator has issued new trial measures and guidelines that seek to standardize the procedures and rules for Chinese companies to go public on overseas stock exchanges. The trial measures provide more regulatory clarity for Chinese IPOs overseas, outlining a range of requirements, such as pre-filing with the domestic authorities and security reviews. It is hoped the measures will offer companies a more legitimate pathway to raising foreign capital while strengthening oversight.
On February 17, 2023, the China Securities Regulatory Commission (CSRC) issued a raft of institutional rules on the overseas listings of Chinese companies. The new measures clarify the requirements for Chinese companies to lawfully list on overseas stock exchanges, thereby eliminating the regulatory grey area in which many public Chinese companies have hitherto been operating in.
The release includes six sets of institutional rules, chief among them being the Trial Measures for the Administration of Overseas Issuance and Listing of Securities by Domestic Enterprises (the “trial measures”), along with five sets of supporting guidelines. The trial measures and supporting guidelines will come into effect on March 31, 2023.
The trial measures seek to facilitate the procedures for overseas Chinese IPOs and reflect China’s ongoing efforts to reform and open its capital markets. They also seek to standardize the overseas listing procedure through measures such as optimizing and consolidating filing procedures for listings, strengthening regulatory oversight and coordination, relaxing restrictions on issuers and currency requirements, and clarifying matters such as filing requirements and legal liabilities.
China recently also reformed its initial public offering (IPO) mechanism for domestic listings, fully implementing a registration-based system on February 17, bringing its domestic stock markets closer into step with that of other countries.
According to an official explainer released along with the trial measures, the purpose of the trial measures is threefold. We discuss how the trial measures seek to achieve these three goals.
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The Two Sessions, or Lianghui (两会), are annual behind-closed-door meetings of China’s major political bodies. They often reveal goals and the policy direction the Chinese government will pursue in the next year, which makes them a highly watched event among foreign businesses and governments.
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Goal 1: Improving the overseas issuance and listing system and implementing reform requirements
Clarifying scope of “direct” and “indirect” listing
The trial measures stipulate the scope of activity that is considered a direct and indirect listing of a domestic company overseas. As stipulated in Article 2:
- “Direct listing” refers to the overseas listing of a joint-stock company registered and established in China.
- “Indirect listing” refers to the overseas listing of a company whose main business activity is conducted in China but in the name of a company registered overseas, whose overseas listing and stock issuance is based on the equity, assets, income, or other similar rights and interests of the company in China.
Security review requirements for overseas Chinese IPOs
Under the trial measures, Chinese companies that want to list overseas are required to “earnestly perform their obligations to maintain national security”. This means ensuring that their overseas listing activities are compliant with China’s national security laws, regulations on foreign investment, and cyber- and data security laws.
Under certain circumstances, a company may be required to undergo a security review by the Cybersecurity Administration of China (CAC), China’s cybersecurity regulator, before submitting an application to overseas securities regulatory agencies or stock exchanges. This procedure may require the company to take certain measures, such as even divesting from certain business assets, in order to eliminate the risk that an overseas listing may pose to national security.
These are the requirements that got the Chinese ride-hailing giant, Didi Chuxing, into hot water when it listed on the New York Stock Exchange despite being told by the cybersecurity regulators to defer the listing until a cyber- and data security review had been conducted. The violations resulted in a fine of US$1.2 billion.
Clarifying companies prohibited from overseas listings
The trial measures also implement a “negative list” of companies that are not permitted to list overseas. Under Article 8 of the trial measures, a company is not permitted to list overseas if its listing financing model is illegal, the overseas listing could endanger national security, the company or its shareholders have committed financial crimes, or the company is being investigated for suspected crimes, among other scenarios.
CSRC filing requirements
The trial measures outline the specific filing requirements for Chinese companies that wish to list overseas, which are contained in Chapter 3.
Among other matters, the trial measures require companies to file with the CSRC in order to list overseas, or, in the case of an indirect listing, designate a major domestic operating entity to act as the responsible domestic entity and file with the CSRC. Companies are required to file with the CSRC within three working days of submitting the documents for stock issuance and overseas listing.
Foreign securities companies that act as a sponsor or lead underwriters for the domestic company’s overseas listing are also required to file with the CSRC and to submit an annual report on the overseas stock issuance and listing of the domestic enterprises in the previous year to the CSRC.
It is important to note that companies that have already listed overseas are not required to undergo all of the procedures that a company undergoing a new listing is, but they will still be required to file with the CSRC within a certain timeframe.
Among the five supplementary guidelines issued along with the trial measures are guidelines for the materials and document formats required for filing with the CSRC.
Goal 2: Improving the regulatory system and strengthening regulatory coordination
Ongoing supervision of overseas-listed Chinese companies
The trial measures take several steps to enhance regulatory supervision of the overseas listing activity of domestic companies, as well as strengthening possible liabilities and punishments for violations.
Article 22 of the trial measures stipulates that the CSRC is required to conduct “supervision, inspection, or investigation of domestic enterprises” that list overseas, as well as the securities companies and service agencies that conduct the overseas listings and stock issuance affairs on behalf of the Chinese companies in China.
The CSRC also has the right to punish the domestic companies (including the securities companies or agencies that conduct the listings on behalf of a domestic company) that have been found to have violated the trial measures in their listing activity.
Meanwhile, Chapter 5 of the trial measures outlines the possible punishments that a company that violates the regulations may be liable for. For instance, for failing to adequately file a listing with the CSRC, a company may be liable for a fine of between RMB 1 million and RMB 10 million, while the persons in charge who are found to be directly responsible could personally be liable for fines between RMB 500,000 and RMB 5 million.
Strengthening cross-border cooperation on enforcement of securities regulations
The trial measures outline mechanisms for the CSRC and other Chinese regulatory authorities to collaborate with foreign securities regulators to oversee and potentially punish Chinese companies for violations.
Specifically, Article 5 of the trial measures states that the “CSRC and relevant competent departments of the State Council shall strengthen supervision and management cooperation with overseas securities regulatory agencies […] with the principle of reciprocity and mutual benefit, and implement cross-border supervision and management.”
Article 26, meanwhile, states that “where a domestic enterprise’s overseas listing violates these Measures […] the CSRC may notify the overseas securities regulatory authority”. It also enables foreign regulatory authorities to “conduct investigations and collect evidence on domestic companies’ overseas listing and related activities” and ask for assistance from the CSRC. However, it also required Chinese companies to obtain approval from the CSRC before providing any relevant documents or materials to the overseas securities authorities, indicating that they can choose to block this information from being supplied if it is deemed sensitive.
Strengthening cooperation with foreign security authorities makes it easier for China to identify and punish companies for violations. The principle of “reciprocity and mutual benefit” also suggests that the CSRC and other Chinese regulatory authorities will assist overseas regulatory authorities to conduct inspections and supervisory work of Chinese companies that are listed on stock exchanges within their jurisdictions, although the scope of this may be limited due to China’s strong data protection and national security laws.
Goal 3: Enhancing institutional inclusiveness and further opening up China’s capital markets
Relaxing restrictions on eligible investors for overseas stocks
The trial measures stipulate that the target investors of overseas listings must be foreign investors. However, they also allow domestic companies that “directly issue and list overseas to implement equity incentives or issue securities to purchase assets” to issue securities to specific target investors that meet CSRC requirements.
These target investors refer to a situation wherein a domestic entity subscribes to securities issued overseas by a domestic enterprise through mechanisms such as qualified domestic institutional investors (QDII) or overseas direct investment (ODI) filing in accordance with the relevant national regulations on cross-border investment. These and other requirements are outlined in the No. 1 in Overseas Issuance and Listing supplementary guidelines.
Relaxing currency restrictions
Under Article 11 of the trial measures, Chinese companies that list overseas are permitted to raise funds in a foreign currency or in RMB and distribute dividends. The remittance and cross-border flow of funds related to overseas issuance and listing of domestic enterprises must comply with regulations on cross-border investment and financing, foreign exchange management, and cross-border RMB management.
According to the official explainer, relaxing the currency restrictions will provide companies with another avenue to raise funds in RMB overseas, and will help further the internationalization of the RMB.
Will the trial measures lead to more overseas Chinese IPOs?
The trial measures serve to standardize and fully legitimize the practice of overseas listings by Chinese companies. This will reduce the likelihood of companies unwittingly getting on the wrong side of the law due to a lack of regulatory clarity, enforcement, and oversight.
In the wake of the Didi affair, the number of Chinese IPOs overseas dropped. From this view, the new regulations may provide Chinese companies with the clarity and confidence needed to pursue overseas listings again, benefitting not just the company looking to raise foreign capital, but also the foreign stock exchanges and investors who could capitalize off of the Chinese IPOs.
However, the trial measures will not necessarily remove all obstacles and risks for Chinese companies to list overseas. For instance, in the US, the most coveted stock market for Chinese companies, China’s strict cybersecurity and data security laws directly clash with US audit requirements, which may result in the possible forced delisting of a host of US-listed Chinese companies, despite recent breakthroughs.
Nonetheless, the measures mark a significant step toward a more robust regulatory framework for Chinese overseas IPOs and potentially allow for better cross-border cooperation on regulatory supervision and enforcement.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
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