Chinese firms with offshore structure to need approval for Hong Kong IPOs -sources

© Reuters. FILE PHOTO: A Chinese national flag flutters outside the China Securities Regulatory Commission (CSRC) building on the Financial Street in Beijing, China July 9, 2021. REUTERS/Tingshu Wang/File Photo

HONG KONG (Reuters) - China's securities regulator is looking to expand its scrutiny of overseas listings by offshore incorporated companies to include initial public offerings (IPO) in Hong Kong, five people with knowledge of the matter said.

The China Securities Regulatory Commission (CSRC) has already been setting up a team https://www.reuters.com/world/china/china-targets-offshore-ipo-structure-require-ministry-approval-sources-2021-07-08 to focus on companies seeking to list offshore using the so-called variable interest entity (VIE) corporate structure which Beijing says has led to abuse.

But some market participants had not expected the scrutiny to be extended to such firms seeking to list in the Chinese territory of Hong Kong - a preferred venue for companies in the world's second-largest economy to raise capital offshore.

However, under the new rules being drafted, CSRC will not exclude Hong Kong-bound Chinese companies with a VIE structure from seeking approval, the people told Reuters on condition of anonymity given the sensitivity of the change.

The move would not augur well for the Asian financial hub as it may make it more challenging for Chinese firms looking for a venue closer to home amid tighter checks in the United States - another top destination for offshore floats.

The proposed changes are part of China's months-long crackdown https://www.reuters.com/world/china/education-bitcoin-chinas-season-regulatory-crackdown-2021-07-27 on private firms to rein in "disorderly expansion of capital" that has involved behemoths like Alibaba (NYSE:BABA), Ant Group and ride-hailing giant Didi.

There is no timeline for the unveiling of the new guidelines, the sources added.

CSRC did not respond to a request for comment, while Hong Kong Exchanges and Clearing Ltd (HKEX), the operator of the local bourse, and the markets regulator Securities and Futures Commission declined to comment.

VIE STRUCTURE

The VIE structure was created two decades ago to circumvent rules restricting foreign investment in sensitive industries such as media and telecommunications, enabling Chinese companies to raise funds overseas via offshore listings.

It has been widely adopted by China's new economy companies, mainly internet firms, that are generally incorporated in the Cayman Islands and British Virgin Islands and therefore fall outside Beijing's legal jurisdiction.

Under the existing rules, Chinese companies with a VIE structure do not have to seek formal regulatory approvals for IPOs in the United States or in Hong Kong, and can bypass the scrutiny and lengthy IPO vetting process that locally-incorporated companies have to go through.

There have been $35.3 billion worth of IPOs in Hong Kong in 2021, of which Chinese companies accounted for 96.3%, according to Refinitiv data. The value of deals is up from $22.76 billion from a year earlier, the data showed.

Separately, HKEX has also increased scrutiny of Chinese IPO candidates that now face more queries on potential regulatory issues, said two of the sources, who advise some of those companies.